One of the main concerns people have when filing bankruptcy is whether they can keep their home. The good news is that most people who want to keep their homes can do so when they file under Chapter 13. Property exemptions protect home equity in bankruptcy. However, what happens with home equity and Chapter 13 when you have excess equity in your home? Keeping reading to find out.
Home Equity and Filing for Bankruptcy Relief
Equity is the value of your home after paying all liens on the home. In other words, subtract the amount of your mortgage and other filed liens from the fair market value of your home to calculate home equity. The equity in your home is what you could use to pay unsecured debts if you sold your home.
When you file bankruptcy, home equity becomes a part of the bankruptcy estate. In other words, the trustee could use the equity in your home to pay unsecured debts. Creditors with unsecured debts do not have collateral on any assets.
However, legislators understand that a person needs to retain some assets to reorganize and recover after a financial crisis. Therefore, they passed federal bankruptcy exemptions to protect the equity in specific assets. The homestead exemption protects a specific amount of home equity when you file for bankruptcy. The court nor your creditors can demand you use the protected equity in your assets to repay unsecured debts.
Many people who file bankruptcy do not have excess equity in their homes. The homestead exemption protects the equity in a debtor’s home. However, a few people might file bankruptcy with excess home equity. What happens when you have too much equity in your home and file bankruptcy?
What Is the Homestead Exemption for My Home?
The federal homestead exemption is $27,900. It is adjusted every three years. Married individuals can double the homestead exemption to $55,800. The homestead exemption only applies to your primary residence. The homestead exemption cannot be used to protect investment, vacation, or rental property.
However, some states require that you use state bankruptcy exemptions. The state exemption might be higher or lower than the federal exemption.
You can use our free bankruptcy exemptions calculator to estimate how much of your home’s equity is protected by bankruptcy exemptions. We also have a list of state homestead exemptions you can access on our website.
The Problem of Having Too Much Equity and Filing Bankruptcy
So how does having too much equity affect your bankruptcy case?
Excess Home Equity and Chapter 7
A Chapter 7 trustee looks for assets they can liquidate and sell to pay your unsecured debts. Therefore, if you have equity in your home that exceeds the homestead exemption, the Chapter 7 trustee might sell your home and use the equity to pay your unsecured creditors.
However, Chapter 7 trustees carefully analyze the home to determine whether seizing and selling the asset benefits the bankruptcy estate. For example, the trustee considers the fair market value based on a quick sale, which is usually lower than the fair market price a realtor uses to sell your home.
Additionally, the trustee estimates the closing costs for the bankruptcy estate, including the Chapter 7 trustee’s fee. The trustee receives a percentage of the amount received by the bankruptcy estate. The amount is calculated after all closing costs and liens are paid in full.
Furthermore, the Chapter 7 trustee calculates how much the unsecured creditors receive based on the claims. If creditors receive a small amount, the trustee could abandon (not sell) the home because it is of “inconsequential value.”
Therefore, even though your home’s equity might be slightly higher than the homestead exemption, a Chapter 7 trustee might not sell the home. However, never assume a Chapter 7 trustee won’t sell an asset with equity, regardless of the amount of equity.
Always talk with a Chapter 7 bankruptcy lawyer before filing bankruptcy if your home has equity.
Once you file a Chapter 7 case, it could be too late to stop the Chapter 7 trustee from selling your home, even if you change your mind about filing for Chapter 7 relief.
Excess Home Equity and Chapter 13
Your options for excess home equity and Chapter 13 differ from Chapter 7. Chapter 13 bankruptcy is a court-supervised repayment plan. You propose a plan to repay your debts over three to five years.
Chapter 13 trustees do not liquidate assets. The excess equity is factored into your Chapter 13 plan payment. Your unsecured creditors must receive an amount equal to or more than they would receive in a Chapter 7 liquidation.
For example, suppose you have $25,000 in excess home equity that a Chapter 7 trustee could use to pay toward unsecured debts. If you spread out the excess home equity over 60 months, that totals about $417 per month.
Let’s assume that your Chapter 13 plan payment includes $600 per month toward unsecured debts based on your disposable income and other factors. In that case, your unsecured creditors would receive more than they would receive in a hypothetical Chapter 7 case. When considering home equity and Chapter 13, filing under Chapter 13 might be the best way to keep your home.
However, suppose you pay less than $600 per month toward unsecured debt in your Chapter 13 plan. The court might require you to increase your Chapter 13 plan payment slightly to cover the excess equity in your home. Even though you might have to pay a little extra each month, you protect your home’s equity and keep your home.
Try our free Chapter 13 calculator to estimate your Chapter 13 plan payment if you filed today.
Get Help with Home Equity and Chapter 13
It can be frightening to think you could lose your home by filing for bankruptcy. Before taking a risk with home equity and Chapter 13, talk with one of our team members at Ascend. We help you explore all debt relief options to find the best one for your situation.
Depending on your situation, a debt management plan or debt payoff plan could help you keep your home and avoid bankruptcy. Sometimes, debt settlement could be your best option for getting out of debt. If you need to file bankruptcy relief, we can help you find a bankruptcy lawyer in your area that offers free consultations.
If you have debts you cannot pay, call or text us at (833) 272-3631 or contact us online for a free case evaluation. At Ascend, our goal is to help you get out of debt while protecting the home you worked hard to purchase.