A common concern many people have when filing bankruptcy is that they will lose their home. This concern mainly applies to a Chapter 7 case. In a Chapter 13 case, the person can keep their home if they can afford the bankruptcy repayment plan and their regular mortgage payment. However, equity in a home can increase the amount of money a debtor must pay through a Chapter 13 bankruptcy case. Let’s look more closely at keeping your home in bankruptcy and how a bankruptcy homestead exemption works.
What is a Bankruptcy Homestead Exemption?
A bankruptcy exemption protects a debtor’s equity in certain assets. If the amount of equity in a property is equal to or less than the state’s bankruptcy exemption, then the property is protected. It cannot be sold and any proceeds used to repay the debtor’s creditors.
The Bankruptcy Code includes the federal bankruptcy exemptions that may be claimed by debtors, including a homestead exemption. States may opt out of the federal exemptions by enacting state-specific bankruptcy exemptions. States can require debtors that have resided in the state for at least two years to use state bankruptcy exemptions. A few states allow debtors to choose between federal and state exemptions.
For illustration, we will use the federal bankruptcy exemptions. The federal bankruptcy homestead exemption is currently $25,150 for cases filed on or after April 1, 2019. The figures are revised every three years for inflation.
If a Chapter 7 trustee liquidates your home, the trustee must pay you $25,150 for your homestead exemption. Please note a state bankruptcy exemption could be higher. Your exemption is paid after the payment of the costs of sale. The costs of sale include the remaining mortgage amount and any closing costs.
If the proceeds of sale less your allowed bankruptcy homestead exemption is a negative amount, the Chapter 7 trustee should not liquidate your home. The trustee’s purpose in liquidating your home is to receive funds for the bankruptcy estate. The trustee can then use these funds to pay creditors. Although, if the Chapter 7 trustee does not anticipate receiving any money, then the liquidation will not benefit the creditors. The trustee must first pay to sell your home along with providing you with the amount equal to your homestead exemption prior to paying any creditors.
However, how much would the Chapter 7 need to receive for the trustee to liquidate your home. That question is a bit more complicated.
When May a Chapter 7 Trustee Liquidate My Property?
There is no simple answer to this question. One of the roles of a Chapter 7 trustee is to represent the interests of your unsecured creditors. Unsecured creditors do not hold a lien on collateral, such as a mortgage or title loan. Therefore, they cannot seize your assets until after they pursue a debt collection lawsuit and obtain a personal judgment against you for the debt you owe. Examples of unsecured debts include credit card bills, medical debts, personal loans, and old utility bills.
A Chapter 7 trustee reviews your property to decide whether to liquidate specific items and use those funds to pay your unsecured creditors. If the trustee believes he can receive sufficient funds to distribute to creditors, the trustee may liquidate certain property.
Each Chapter 7 trustee must carefully consider all factors before deciding to sell an asset. Factors include, but are not limited to:
- The anticipated sales price for the property;
- The costs of the sale, including a realtor’s commission and closing costs;
- The Chapter 7 trustee’s commission (graduated percentage based on the amount received by the estate – 25% of the first $5,000, 10% of the next $45,000, and 5% on amounts up to $1,000,000);
- Any liens against the property which must be paid from the sales proceeds; and,
- The bankruptcy exemptions claimed by the debtor, which must also be paid before unsecured creditors receive any money.
If creditors receive a few pennies on the dollar, the trustee may determine that the property is of “inconsequential value.” In this case, the trustee may decide not to liquidate the property.
However, you can never assume that a trustee will abandon (not sell) property just because there is a minimal amount of equity in the property. The Chapter 7 trustee has the discretion to decide when to liquidate the property. Chapter 7 bankruptcy attorneys typically are familiar with the trustees assigned to cases in their jurisdiction. Attorneys are usually aware of how certain trustees handle cases and which trustees may be more willing to liquidate smaller assets.
How Does the Bankruptcy Homestead Exemption Work in a Chapter 13 Case?
Chapter 13 trustees do not liquidate property. Therefore, if you have equity in your home that exceeds your bankruptcy exemption, the Chapter 13 trustee is not going to liquidate your home. However, you could be required to pay more money to your unsecured creditors through your Chapter 13 bankruptcy plan.
The key is to determine how much money unsecured creditors would have received in a Chapter 7 case. Your Chapter 13 plan must pay unsecured creditors at least as much as they would have received had you filed under Chapter 7. Therefore, if your unsecured creditors are receiving less through the Chapter 13 plan, the trustee may require you to increase the plan payment until unsecured creditors receive at least as much as they would in a hypothetical Chapter 7 liquidation.
For example, $50,000 is available for unsecured creditors in a hypothetical Chapter 7 liquidation. That amount would equal a monthly payment toward unsecured debts of $833 over a 60-month Chapter 13 plan.
If your Chapter 13 payment pays unsecured creditors $1,000 a month based on your disposable income and other factors, that should be sufficient to cover the amount they would have received through a Chapter 7 liquidation. However, if unsecured creditors are scheduled to receive less than $833 per month through your Chapter 13 plan, you may need to increase your plan payment until the unsecured creditors receive at least $833 per month.
Factors to Consider When Calculating How Much Money Unsecured Creditors Might Receive in a Chapter 7 Liquidation
A Chapter 13 bankruptcy trustee considers how much money the bankruptcy estate might receive if a Chapter 7 trustee liquidated the home. The Chapter 13 trustee should consider all of the same factors that a Chapter 7 trustee considers when deciding whether to liquidate a home.
However, another important consideration is that homes in bankruptcy typically are sold at a discounted value. Purchasers may not want to wait for the court to approve the sale. They may also fear that the debtor will save the home at the very last moment. Therefore, bankruptcy sales often result in a lower sales price. However, there is no set formula because markets vary significantly by location and by the current economic climate.
An experienced Chapter 13 bankruptcy attorney generally knows the maximum percentage the Chapter 13 trustees in that jurisdiction allow for calculating the decrease in the home’s value. This knowledge is based on the home being sold through a Chapter 7 liquidation instead of a standard real estate transaction. .
Ask for Help If You Have Questions About the Bankruptcy Homestead Exemption
If you are unsure whether your home could be at risk in a bankruptcy case, it is best to seek advice from an experienced bankruptcy lawyer. A bankruptcy lawyer understands how to apply bankruptcy exemptions to maximize the protection of your home. An attorney also understands how to minimize the value of a home to reduce the potential equity for the bankruptcy estate.
Please contact Ascend if you have questions about filing bankruptcy. We can help you find a bankruptcy lawyer or provide additional information about bankruptcy options. Call or text us at 833-272-3631 to speak with a representative.