Determining Equity Factors when Filing for Chapter 7 Bankruptcy

When you file bankruptcy, whether Chapter 13 or Chapter 7, you might be able to keep your home. You can keep all of your assets, including your home if you file Chapter 13 reorganization, but you can only keep exempt assets if you file Chapter 7 liquidation. California allows you to exempt a certain amount of equity. If your home has more equity in it, then that part of the equity is not covered, and the bankruptcy court could force you to sell your home.

Speaking with an experienced bankruptcy attorney before you file for bankruptcy ensures that you choose the method best for your situation.

Keeping Your Home During Chapter 7 Bankruptcy

Whether you can keep your home after filing Chapter 7 bankruptcy depends on the amount of equity in the house. Only a certain amount of equity is exempt. If you have more than that, the bankruptcy court can force you to sell your home or contribute the amount of equity to the bankruptcy to pay your creditors.

To determine equity, you need the fair market value of your home. If you can afford it, it is best to have your home appraised. An appraisal by a licensed professional is less likely to be questioned.

Once you have the fair market value, subtract the closing costs. In most cases, they are six to seven percent. However, if you are selling as part of a bankruptcy, you’ll have to add the trustee’s attorney’s fee into the equation. This could bring your closing costs up to as much as 10 percent of the home’s value.

In addition to subtracting the closing costs, you must subtract any liens, such as the first and second mortgages, unpaid taxes, judgments, and other liens filed against the property.

Finally, subtract the current homestead exemption amount for your county. If the result is a positive number, you still have some equity in the property. This is called “exposed” equity, and the trustee can demand that you sell your home or pay the amount of the equity into the bankruptcy so pay other creditors.

If the result is negative, you will most likely be filing a “no asset” bankruptcy and will most likely keep your home. To determine how much equity is in your home, you must consider the following equity factors:

• • Age of Your Home

When an appraiser values your home, they take the age of the house and several other factors into consideration to determine the value of the property. The appraiser arrives at the value of your home by comparing homes that have similar features, square footage and lot size to homes in your neighborhood that sold in the past couple of months.

• • The Date of Purchase: When You Bought Your Home

The date you purchased your home has a significant impact on equity. The longer you’ve had your home, the more equity you have in it. Additionally, suppose you purchased your home just a few months before filing bankruptcy. In that case, the filing could deem your mortgage in default, and the creditor could accelerate the loan – even if you are current on payments.

• • Your Marital Status

Some people who plan on divorcing consider filing bankruptcy after a divorce. However, if you file before the divorce, both your slates are wiped clean, and you can claim the homestead exemption on your home. You might be able to keep your home if you file Chapter 7 because the homestead exemption is deducted when computing equity.

• • The County You Live In

The county you live in determines the homestead exemption you can take for your home when filing bankruptcy. If you are considering filing bankruptcy, contact a bankruptcy attorney at SM Law Group, APC, for a consultation.