Determining whether or not to file bankruptcy can be very challenging, particularly if you own a home. If you file for bankruptcy, you may be able to to keep your home. This depends on a number of factors (including the amount of equity in your home) and whether you file Chapter 7 bankruptcy or Chapter 13 bankruptcy.
In general, most people who file for Chapter 7 bankruptcy are able to keep their homes (as long as they are current on their mortgage payments). A few Chapter 7 bankruptcy filers lose their home because there is significant equity in the property that can be used to pay unsecured creditors. A Chapter 13 bankruptcy may allow filers to pay off a mortgage arrearage through the bankruptcy.
[image courtesy of Flickr user dominikgolenia]
Losing Your Home: Bankruptcy vs. Foreclosure
A homeowner can lose his or her house through bankruptcy or foreclosure. It is important to distinguish these two scenarios. If there is sufficient equity in your home, filing a Chapter 7 bankruptcy may trigger a sale of the property by the bankruptcy trustee regardless of whether you are behind on your mortgage payments. The bankruptcy trustee will sell your home, and use proceeds from the sale to pay unsecured creditors.
A foreclosure, on the other hand, occurs only when you are behind on your mortgage payments. If you fail to make your mortgage payments, you may eventually lose your home in a foreclosure that takes place outside of the bankruptcy process. This may occur even though the bankruptcy trustee did not sell your home when you filed for Chapter 7 bankruptcy.
How Do I Keep My Home?
If you file Chapter 7 bankruptcy, you can keep your home if you have no equity in your home. You may also keep your home if you are able to “exempt” (or protect) the equity you do have in your home, using what is known as the “homestead exemption.” The homestead exemption will be discussed further below.
A bankruptcy trustee will not sell your home if there would be no money after the sale to distribute among your unsecured creditors. Because most people who file Chapter 7 bankruptcy do not have enough nonexempt equity in their homes to trigger a sale by the trustee in a bankruptcy proceeding, most debtors can keep their homes in bankruptcy.
You should consult with an experienced bankruptcy lawyer to determine whether you will be able to keep your home after filing a Chapter 7 or Chapter 13 bankruptcy. However, the following two-step process can help you understand whether keeping your home is a likely option for you should you file bankruptcy.
STEP ONE: Determine the Amount of Your Homestead Exemption.
In most states, homeowners who file for bankruptcy can protect a certain amount of equity in their homes from creditors. Known as the “homestead exemption,” this principle of bankruptcy law allows people who file for bankruptcy to keep their home if there is insufficient equity to trigger a sale of the property.
Properly evaluating the amount of your homestead exemption can be very complicated. You should consult with a reputable bankruptcy attorney to determine which homestead exemption (and in what amount) will apply to you.
In most states, there is a homestead exemption amount that is typically based on a dollar amount. There is also federal homestead exemption, but it can only be used in some states. The homestead exemption that will apply to you in a bankruptcy proceeding depends on a number of factors, including where and when you bought your house, whether the state in which you plan to file bankruptcy allows use of the federal homestead exemption, and whether you have recently moved.
In California, there are two exemption systems (often called 704 and 703) that govern whether bankruptcy filers can keep their homes. Under C.C.P. 704, the following rules apply:
- People who are single and are not disabled may exempt up to $75,000 of the equity in their home;
- People who live with another family member may exempt up to $100,000 of the equity in their home;
- People who are 65 and older or people who are physically or mentally disabled and unable to engage in gainful employment may exempt up to $175,000;
- People who are 55 and older, single, and earn a gross annual income lower than $25,000 may exempt up to $175,000 of the equity in their home; and
- People who who are married and earn a gross annual income lower than $35,000 may exempt up to $175,000 of the equity in their home.
Under C.C.P. 703, homeowners can effectively exempt up to $26,925 of the equity in their home.
STEP TWO: Calculate the Unprotected Equity in Your Home.
Once you determine the homestead exemption that applies to you, you must calculate the amount of nonexempt equity (equity not protected by the homestead exemption) in your home. If there is not enough nonexempt equity to trigger a sale of your home, you will likely be able to keep your home if you are current on your mortgage payments. If there is enough nonexempt equity to trigger a sale, you may not be able to keep your home.
To begin, determine the market value of your home. Then, subtract the following:
- The amount of homestead exemption you are allowed to claim (based on the rules above);
- The commission that a trustee would make on the difference between the market value of your home and the homestead exemption (this is typically 25% of the first $5,000, 10% of the next $50,000, and 5% of the rest);
- The cost of selling the home (typically around 8% of the market value);
- The amount owed on all mortgages; and
- The amount of nonmortgage liens secured by the home (such as a tax lien).
- Any long term capital gains taxes incurred due to the sale of the property had you sold the home yourself.
If these calculations net a negative number, you do not have enough equity in your home to trigger a sale by the bankruptcy trustee in a Chapter 7 proceeding. If these calculations net a positive number, the Chapter 7 bankruptcy trustee may sell your home. This is because there will be funds left over to pay your unsecured creditors.
For more in-depth information on whether you will be able to keep your home if you file for Chapter 7 bankruptcy in California, speak with an experienced bankruptcy lawyer.
Chapter 7 Bankruptcy and Foreclosure
If you are planning to walk away from your home, Chapter 7 bankruptcy may provide some relief (by delaying the foreclosure). However, Chapter 7 bankruptcy will not help you pay off arrears or permanently stop a foreclosure.
You may want to consider negotiating with your lender before filing for bankruptcy if you are behind on mortgage payments. You may also want to consider filing Chapter 13 bankruptcy, which may allow you to pay off an arrearage through the bankruptcy.
For a free and confidential consultation with a California bankruptcy lawyer, call the Spaulding Law Group at (714) 731-7595.