diff --git a/crates/terminal_view/src/terminal_view.rs b/crates/terminal_view/src/terminal_view.rs
index b9dabee7e82064ebe055893306241f995654b82b..66e6c605f9b560dc36db3dde16e84c2ee8c0c5b5 100644
--- a/crates/terminal_view/src/terminal_view.rs
+++ b/crates/terminal_view/src/terminal_view.rs
@@ -1556,7 +1556,8 @@ pub(crate) fn default_working_directory(workspace: &Workspace, cx: &App) -> Opti
             .read(cx)
             .active_project_directory(cx)
             .as_deref()
-            .map(Path::to_path_buf),
+            .map(Path::to_path_buf)
+            .or_else(|| first_project_directory(workspace, cx)),
         WorkingDirectory::FirstProjectDirectory => first_project_directory(workspace, cx),
         WorkingDirectory::AlwaysHome => None,
         WorkingDirectory::Always { directory } => {
@@ -1570,10 +1571,13 @@ pub(crate) fn default_working_directory(workspace: &Workspace, cx: &App) -> Opti
 ///Gets the first project's home directory, or the home directory
 fn first_project_directory(workspace: &Workspace, cx: &App) -> Option<PathBuf> {
     let worktree = workspace.worktrees(cx).next()?.read(cx);
-    if !worktree.root_entry()?.is_dir() {
-        return None;
+    let worktree_path = worktree.abs_path();
+    if worktree.root_entry()?.is_dir() {
+        Some(worktree_path.to_path_buf())
+    } else {
+        // If worktree is a file, return its parent directory
+        worktree_path.parent().map(|p| p.to_path_buf())
     }
-    Some(worktree.abs_path().to_path_buf())
 }
 
 #[cfg(test)]
@@ -1606,7 +1610,7 @@ mod tests {
         });
     }
 
-    // No active entry, but a worktree, worktree is a file -> home_dir()
+    // No active entry, but a worktree, worktree is a file -> parent directory
     #[gpui::test]
     async fn no_active_entry_worktree_is_file(cx: &mut TestAppContext) {
         let (project, workspace) = init_test(cx).await;
@@ -1621,9 +1625,9 @@ mod tests {
             assert!(workspace.worktrees(cx).next().is_some());
 
             let res = default_working_directory(workspace, cx);
-            assert_eq!(res, None);
+            assert_eq!(res, Some(Path::new("/").to_path_buf()));
             let res = first_project_directory(workspace, cx);
-            assert_eq!(res, None);
+            assert_eq!(res, Some(Path::new("/").to_path_buf()));
         });
     }