Your Home May by Safe in Chapter 7 Bankruptcy
The short answer is maybe. It depends on the type of bankruptcy filed, the equity in your home, your state of residence, and who else owns the home with you. Let’s take it step-by-step.
First. If you are a homeowner considering bankruptcy, you must determine the amount of equity in your home. Your home value should be determined through a qualified, residential appraiser local to your area. However, if you cannot afford the appraisal, one realtor could provide you with a comparative market analysis (CMA) and another realtor could provide you with a brokers price opinion (BPO). If the CMA and BPO agree with each other, then together they may suffice as a substitute for a formal appraisal. Still, the best approach is to obtain the services of a qualified, residential appraiser.
Second. Just because a home may be reasonably valued at $200,000, that does not mean a seller will net that amount after sale. There are cost of sale that must be accounted for. Realtor fees, advertisement costs, auction fees, transfer taxes, etc. all must be paid from the proceeds. A good estimate is usually 8% of the value subtracted from the appraised sale price to pay for the disposition costs (adjusted value).
Third. Once you have appropriately determined the adjusted value of your home (appraised value – disposition costs), you need to determine the amount of mortgage and liens against your home to determine remaining equity. You subtract the total amount of mortgages and liens from the adjusted value to obtain the equity.
Fourth. Next, you are permitted to deduct your maximum exemptions of equity. A single person can exempt up to $21,625 of the equity. A married couple filing bankruptcy jointly can exempt twice as much ($43,250).
Last. If all of your equity is exempted by the Bankruptcy Code, you may be a good candidate for a Chapter 7 bankruptcy and keep your home. If you have positive equity that cannot be protected, though, you may not want to file a Chapter 7 bankruptcy. Unexempted equity will induce a bankruptcy trustee to sell the home and use the unexempted equity to pay your creditors.
Although the above appears to be complicated, it is actually more complicated. Many, many considerations must be accounted for making consultation with a bankruptcy attorney a necessity. If you want to keep your home through Chapter 7 bankruptcy, you should obtain the advice of an attorney.
Some Basic Bankruptcy Examples For Illustration Only
| 1. You and your spouse are considering Chapter 7 Bankruptcy. You both own the home. You both want to petition for bankruptcy. An appraisal reasonably values the home at $300,000. | |
| Home Appraisal |
$300,000 |
| Disposition Costs (8%) |
- 24,000 |
| Adjusted Home Value |
= 276,000 |
| First Mortgage |
- 150,000 |
| Second Mortgage |
- 86,000 |
| Equity |
= 40,000 |
| Spouse 1 Exemption (up to $21,625) |
- 20,000 |
| Spouse 2 Exemption (up to $21,625) |
- 20,000 |
| Total Unprotected Equity? |
= $0 |
| Result? |
Likely Keep Home |
| 2. You are considering Chapter 7 Bankruptcy. Your spouse will not file. You both own the home. An appraisal reasonably values the home at $400,000. | |
| Home Appraisal |
$400,000 – 50% Spouse’s share = 200,000 |
| Disposition Costs (8%) |
- 16,000 |
| Adjusted Home Value (Filing Spouse) |
= 184,000 |
| First Mortgage |
-150,000 – 50% Spouse’s share = 75,000 |
| Second Mortgage |
-16,000 – 50% Spouse’s share = 8,000 |
| Equity |
= 101,000 |
| Your Exemption (up to $21,625) |
- 21,625 |
| Total Unprotected Equity? |
= $79,375 |
| Result? |
Likely Lose Home |
| 3. You and your spouse are considering Chapter 7 Bankruptcy. You both own the home. You both want to petition for bankruptcy. An appraisal reasonably values the home at $125,000. | |
| Home Appraisal |
$125,000 |
| Disposition Costs (8%) |
- 10,000 |
| Adjusted Home Value |
= 115,000 |
| First Mortgage |
- 25,000 |
| Second Mortgage |
- 30,000 |
| Equity |
= 60,000 |
| Spouse 1 Exemption (up to $21,625) |
- 21,625 |
| Spouse 2 Exemption (up to $21,625) |
- 21,625 |
| Total Unprotected Equity? |
= $16,750 |
| Result? |
Likely Lose Home |
| 4. You are considering Chapter 7 Bankruptcy. Your spouse will not file. You both own the home. An appraisal reasonably values the home at $200,000. | |
| Home Appraisal |
$200,000 – 50% Spouse’s share = 100,000 |
| Disposition Costs (8%) |
- 8,000 |
| Adjusted Home Value (Filing Spouse) |
= 92,000 |
| First Mortgage |
- 200,000 – 50% Spouse’s share = 100,000 |
| Second Mortgage |
- 40,000 – 50% Spouse’s share = 20,000 |
| Equity |
= – 40,000 (negative equity) |
| Your Exemption (up to $21,625) |
- 0 (no need for exemption) |
| Total Unprotected Equity? |
= $ 0 |
| Result? |
Likely Keep Home |
Chapter 7 bankruptcy is the fastest way to a “fresh start” and a discharge of
Chapter 7 Bankruptcy is the Fastest Way to a Fresh Start
your dischargeable debts. It truly provides a “fresh start.” Keeping your home in a Chapter 7 bankruptcy, however, requires professional preparation and careful compliance with a myriad of complex bankruptcy laws. You should consult a bankruptcy attorney to determine if it would be in your best interests to file a Chapter 7 bankruptcy as a homeowner. After shedding dischargeable debt, for those consumers who can afford their home after bankruptcy, Chapter 7 can be a refreshing strategy to manage consumer debt and keep a roof over your head.