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Equity is the value of your home minus what you owe.
Your Homestead exemption determines how much equity in your home is protected.
There are two systems:
Some states require you to use their system, while others let you choose.
Example:
→ This is why location is important.
A Chapter 7 trustee represents the best interest of unsecured creditors. They search for a property they can sell to pay the unsecured debts. Therefore, if you have non-exempt equity in your home, the Chapter 7 trustee may sell the house, pay you the exempted amount, and use the remaining funds to pay unsecured creditors.
In a Chapter 13 case, the Chapter 13 trustee does not sell property with non-exempt equity. Instead, the non-exempt equity must be paid to the unsecured creditors. Therefore, non-exempt equity generally increases the amount of your monthly Chapter 13 plan payments. However, you will not pay more to a creditor than you owe that creditor.
The process typically begins with the appointment of a licensed appraiser who conducts a thorough evaluation of the property. This evaluation considers various factors such as the size, condition, location, and comparable sales in the area. The goal is to arrive at a fair market value for the property.
Once the home is appraised, the value obtained becomes a key piece of information for the bankruptcy trustee and creditors. If the property's value exceeds the exemption limit set by bankruptcy laws, it may be subject to liquidation. In such cases, the trustee may opt to sell the property and distribute the proceeds among the creditors to satisfy the debts.
However, if the property's value falls within the exemption limits, the debtor may be allowed to keep the home. Each state sets its own exemption limits, which can vary widely. Some states offer generous exemptions for primary residences, allowing debtors to retain their homes even in bankruptcy proceedings.
Each trustee is different. However, many trustees follow a simple formula for calculating the non-exempt equity in a home:
Market value of your home
LESS: mortgage payoffs
LESS: any filed lien (such as tax liens)
LESS: estimated closing costs
LESS: claimed bankruptcy exemptions
It is important to note that most bankruptcy trustees recognize that the value of a home in a quick sale may be lower than the home's appraised value if it could remain on the market until it sold for the appraised value. Therefore, the trustee may use a lower value for calculating the non-exempt equity in your home than the current appraised value.
In general, Chapter 7 bankruptcy trustees do not pursue a home with minimal equity. The cost of liquidating the property may be overly burdensome for the estate based on the amount creditors might receive after paying closing and administrative costs.
Therefore, if you have equity in your home, speaking with a bankruptcy lawyer is wise before filing Chapter 7 or Chapter 13.
Experienced bankruptcy attorneys have learned how trustees in their jurisdiction approach this question. For example, a Chapter 7 trustee may deduct 10% from the home's appraised value for a quick sale. A local bankruptcy lawyer can give you a better idea of whether a Chapter 7 trustee might sell your home if you file Chapter 7. The attorney can also advise you how the equity in your home would impact the monthly payments in a Chapter 13 case.
Filing for bankruptcy might be a good option. If you are interested in speaking with a bankruptcy lawyer, we can refer you to a bankruptcy lawyer near you who offers a free bankruptcy consultation. However, if you have a simple Chapter 7 bankruptcy case, Ascend’s bankruptcy software could help you file Chapter 7 without an attorney.
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