Can I Keep My House in Chapter 7?

Frequently, I get calls from clients who has a “quick question” - Can I keep my house in Chapter 7? What I find to be curious is that for most folks, their home is their most significant asset. It’s where you live, sleep at night, your children grow up, yet, they want to resolve whether they can keep the house in Chapter 7 over a 2 minute telephone call.

Will I Lose My Home in Chapter 7? Short Question - Long Answer

In bankruptcy, you are entitled to keep certain amount of assets known as “exemptions.” Any property that is not exempted is subject to liquidation in Chapter 7. Liquidation means that the trustee can take unexempt property, sell it to pay your creditors.

You may have heard that you can keep one house in bankruptcy. Not true! Each state has its own exemptions and in California, you are entitled to keep the following amount of equity.

$75,000 for single person
$100,000 for family unit
$175,000 for senior, disabled or over 55 years old with limited income.

It’s important to remember that these amounts are equity in your home. So, if your home is worth $700,000 and you have a mortgage of $650,000, there is ostensibly $50,000 in equity. However, costs associated with the sale such realtor commissions and capital gains can deplete all or part of the equity.

The housing market is picking up in the Bay Area, and because of the high value of most Bay Area homes, the equity exemption doesn’t always go very far.

How Does the Trustee Value My House?

I always cringe whenever a client tells me that their home is worth $x based on zillow.com. Don’t get me wrong, zillow.com is fine for an estimate but incorrectly valuing your home can lead to the trustee selling your house! So, it’s important to get a recent full appraisal for your home from a reputable appraiser who is familiar with your area.

Even if your appraiser values your home at a certain dollar amount, the trustee is not bound by that number. The trustee will frequently send out his or her own real estate agent to your house to value it.

How Does the Trustee Decide if There’s Excess Equity?

The important thing to know is that the trustee can list your home for sale and let the market dictate the value.

Let’s take an example:

Suppose your appraiser says your home is worth $900,000. You have $800,000 in mortgage, leaving $100,000 in equity, which you protect using your exemption.

However, the trustee’s real estate agent thinks he can sell your home for $1,100,000. The trustee can simply list your home for sale and see what the going rate is! He can market the house, sit on it for 6 months, wait for the right buyer and sell it. If the trustee does sell your home, you would be entitled to the first $100,000 (the exemption amount), the mortgage lender gets its $800,000, and the realtor and trustee get their expenses/commission. Anything left over goes to the unsecured creditors.

Ways to Protect Your Home in Bankruptcy

There are several things you can do to protect your home through bankruptcy.

1. Only file Chapter 7 if your home is well under exemption amount. Don’t file for Chapter 7 if [mortgage + exemption] is too close to the fair market value. Home values are rising so quickly that it’s not unusual for the home to appreciate significantly over a short period of time.

2. File Chapter 13. If the numbers are close or if there’s any concern about the trustee selling the home, file Chapter 13. In Chapter 13, instead of the trustee liquidating (selling) your unexempt assets, you repay that amount over 60 months. So, for example, if there’s $30,000 of unexempt equity, you would repay $500 per month for 60 months ($500 x 60 = $30,000). *
*For the purposes of this post, I am totally oversimplifying this but that’s the general idea.

Final Thoughts

Unfortunately, in the past 6 months or so, I’ve been getting calls from panicked debtors who filed for Chapter 7 without realizing that they may lose the home in bankruptcy! Some were represented by inexperienced counsel, others were pro per. It’s always easier to plan for ways to protect the home before filing for bankruptcy. Imagine Chapter 7 like a door that you walk through. The door closes and locks behind you. There’s no un-do or reset button in Chapter 7.

Image credit: precipices

• Tweet