Generally, a debtor's home equity is exempt from creditors in bankruptcy. But, says attorney Stuart Pack of Nagle Law Group in Phoenix, it's important to remember that the amount of the exemption varies by state. In Florida, where there's no limit to the homestead exemption, seniors filing for bankruptcy can protect their equity and keep the home, even in a Chapter 7 filing, which liquidates all nonexempt assets to pay off creditors. But seniors in states with low homestead exemptions don't fare as well.
"Suppose a senior citizen has $100,000 in equity and a (homestead) exemption of $20,000," says Powell. "In that case, it would be foolish to move forward on a Chapter 7."
According to Powell, the best alternative for a senior with high equity and a low homestead exemption is to file for a Chapter 13. That means the senior will keep paying the mortgage (although possibly at a lower rate). If the senior has no mortgage, a Chapter 13 can force the senior to take out a loan to pay off the restructured debt. However, many seniors are at a particular disadvantage in this situation, says Powell, because they don't have disposable income to pay off the loan and they're unlikely to be able to go back to work.