There can be many scary aspects to the bankruptcy process, but few are as frightening as the potential of losing your home. It is important to separate reality from fiction to make the best decisions for your financial future.

The reality is that not all bankruptcies end with the debtor losing his or her home. According to Findlaw, you can only lose your home under a Chapter 7 bankruptcy, and this will only happen if the home has positive equity.

What is special about a Chapter 7 bankruptcy? 

Another way to refer to a Chapter 7 bankruptcy is by calling it a “liquidation” bankruptcy. This is because the courts may decide to liquidate your belongings in order to pay off your creditors as much as possible.

When it comes to personal bankruptcy, most Americans file Chapter 7. However, there is also the Chapter 13 bankruptcy, known as a “reorganization” bankruptcy. With a Chapter 13 bankruptcy there is no risk of losing any of your assets, including your home.

What is equity? 

Put simply, equity is the difference between the current market value of a property and any mortgages or home equity loans the owner has taken out on that property. It is highly likely that if you are filing a Chapter 7 bankruptcy that this amount is negative. If you have negative equity on your home, the courts will declare your home exempt from liquidation.

However, keep in mind that it may be a good thing to walk away from a property if you cannot afford the mortgage payments. Filing a Chapter 7 bankruptcy is one of the only chances you have to do this without suffering further consequences.