Your house is your biggest asset, will you lose it in bankruptcy?
This is a question many homeowners are anxious to find out. After all, for many families, their home is their biggest investment. In bankruptcy, property is divided into two piles: exempt an non-exempt. You keep exempt property and non-exempt property is subject to sale by the trustee. In the vast majority of cases, Chapter 7 debtors don’t lose any of their property because it’s all exempt. Tax refunds and not homes are what trustees usually go after. Why? Because laws are in place to protect homes in bankruptcy.
Through homestead exemption laws, each state allows different amounts of home equity to be protected through the Chapter 7 process. It is only when your home equity (not appraised value) exceeds your state’s exemption limit that you risk losing your house to the chapter 7 bankruptcy trustee. Underwater homes are never going to peak the trustee’s interest, no equity means no chance of sale. What is your state’s exemption limit? Consult a bankruptcy attorney to find out or simply Google “my state’s homestead exemption.”
Need a Homestead Example?
When it comes to protecting people’s homes, some states are more generous than others. States like Florida have traditionally offered unlimited homestead protection while Kentucky bankruptcy laws only allow for a $5,000 homestead exemption. In North Carolina, debtors can exempt $35,000 of equity in their home. Equity that exceeds the $35,000 limit will either have to be paid out to creditors or the property will be sold at auction. Keep in mind, the bankruptcy trustee does not want to auction your house. There is great expense associated with selling a house. Therefore it is often possible to “buy out” the non-exempt value in your house by paying the bankruptcy trustee cash equal to your non-exempt home equity. This will allow you to file bankruptcy and keep your home.
Significant Home Equity?
It is crucially important that those with significant home equity consult with a knowledgable bankruptcy attorney in order to ensure that their home will be protected. In the above example, if you were to file for chapter 7 bankruptcy in North Carolina with $65,000 of home equity, the trustee would likely want to sell your house. If this were to occur, you would be entitled to a check for the amount of the exemption ($37,000) after the sale. In bankruptcy, your creditors only have rights against your non-exempt equity, the first $37,000 is yours.
Chapter 13 Bankruptcy is an Option
One of the primary reasons people file for Chapter 13 bankruptcy is to catch up on mortgage arrearages and to stop foreclosure. Chapter 13 bankruptcy also allows debtors to pay out the value of non-exempt home equity over time in order to avoid having their home sold by the bankruptcy trustee. Chapter 13 bankruptcy is an attractive option for the debtor who has non-exempt home equity but cannot afford to pay the trustee its value. In this case, a Chapter 13 case can be filed to protect the house.
Bankruptcy issues related to housing can be complex, if you have questions consult a bankruptcy attorney.
Erik Clark is one of the leading bankruptcy attorneys in Southern California who has had the privilege of representing thousands of clients in chapter 7 and chapter 13 bankruptcy cases in the Los Angeles area. Erik has served as the past President of the National Consumer Bankruptcy Litigation Center (NCBLC) and the American Consumer Bankruptcy College (ACBC). His firm, Borowitz & Clark, is committed to using bankruptcy law as a tool for social justice and was one of the first consumer law firms to join the Law Firm Antiracism Alliance.