The value of your home impacts your bankruptcy case regardless of whether you file under Chapter 7 or Chapter 13. The bankruptcy trustee carefully reviews the value of your home to determine if you have non-exempt equity that could be used to pay your unsecured debts.
Before we discuss how a bankruptcy trustee values your home, it helps to understand what non-exempt equity means.
What Is Non-Exempt Equity?
Equity is the value of your property that you receive when the property is sold. You calculate equity by subtracting valid liens from the value of the property.
For example, let’s assume your home is worth $200,000. You owe $150,000 on your first mortgage and $20,000 on your second mortgage. The equity in your home is $30,000. If you sold your home, you could expect to receive $30,000, less the closing costs and fees associated with selling a home.
You may claim exemptions in specific assets when you file bankruptcy. Assets include everything you own or have an interest in when you file the bankruptcy petition.
Bankruptcy exemptions allow you to protect the equity in the specific property from being used to repay your unsecured creditors. General unsecured creditors include medical bills, credit cards, personal loans, and most personal judgments. A secured creditor has a legal lien on the property, such as mortgage lenders.
What Is the Homestead Exemption In My State?
One of the most important things to consider may be the homestead exemption in your state along with other bankruptcy exemptions (car equity, cash, etc.). As such we compiled all of the state guidelines and put together the free bankruptcy calculator below that can highlight which assets you own that may be at risk if you file bankruptcy.
Federal Bankruptcy Exemptions vs. State Bankruptcy Exemptions
The Bankruptcy Code includes a list of federal bankruptcy exemptions. The maximum federal bankruptcy exemption for a homestead is $25,150 per debtor as of April 1, 2019. If both spouses own the property and file jointly, the maximum exemption would be $50,300. The amounts change every three years, so there should be an update for April 1, 2022.
However, the Bankruptcy Code allows each state to enact bankruptcy exemptions that individuals must use when they file for bankruptcy relief within that state. Many states have bankruptcy exemptions from homestead that debtors must use. Some states allow individuals to choose between federal and state bankruptcy exemptions.
For example, the bankruptcy exemption for a home in Oregon is $40,000 for a single filer or $50,000 for a married couple filing jointly. You might also be able to use a wildcard exemption to protect more equity in the home. Therefore, if you own a home with equity and file Chapter 7 in Oregon, it might be better to choose the state bankruptcy exemptions because they are higher than the federal bankruptcy exemptions.
State bankruptcy exemptions are subject to change. Therefore, you should always check to ensure you use the most current figures when calculating non-exempt equity in a home.
How Does Non-Exempt Equity Impact My Bankruptcy Case?
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.
How Chapter 7 Home Appraisal Works
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.
How Does a Bankruptcy Trustee Calculate the Equity in Your Home?
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.
What Can You Do If You Cannot Pay Your Bills?
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.
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