There is no dispute that real property values are on the rise nationwide. Southern California, and Orange County in particular, are setting the pace for the national housing recovery. According to Andrew Khouri of the Los Angeles Times citing DataQuick, Southern California home prices are up 28% from June 2012 to June 2013. While this is clearly a better trend than the devastating drop in property values that homeowners experienced beginning in late 2008, there are a host of negatives associated with rising property values when it comes to homeowners who may still need bankruptcy protection.
Over the last 4 years, a large percentage of Orange County bankruptcy filers have owned real property with secured debt exceeding the market value of the home (a.k.a. “underwater property”). And, although this is an undesirable position in a real world context; underwater property is often times a benefit in a bankruptcy context.
In the framework of a Chapter 7 bankruptcy, if real property is underwater or lacks equity above the debt secured against the property; the property is of no value to the bankruptcy estate. Or, in other words… if you file a Chapter 7 bankruptcy and your house (or any property for that matter) has no equity, the bankruptcy trustee will not take it from you. In a Chapter 13 bankruptcy, there are two immediate benefits to underwater real property:
- A debtor with real property that has a fair market value less than the amount due on the 1st mortgage may strip, or get rid of, a junior lien (e.g. 2nd mortgage, 3rd mortgage, HELOC, etc.)
- Underwater real property will often times allow a debtor to pay less to unsecured creditors over the life of the Chapter 13 repayment plan.
With real property values rising at such a staggering rate here in Orange County and Southern California, the window for many people to file bankruptcy and get a fresh start is closing quickly. In California, a competent bankruptcy attorney is able to protect equity in a debtor’s primary residence ranging from $75,000 up to $175,000. However, when this homestead exemption is used to protect such equity, a lessened amount of other personal property can be exempted from liquidation. Likewise, in a Chapter 13 bankruptcy, the opportunity for a debtor to get rid of that 2nd mortgage or home equity line of credit is vanishing quickly as home values rise.
If you know someone who is having trouble making ends meet each month, but is now feeling optimistic because home values are increasing, slap them (metaphorically of course) and tell them to contact a bankruptcy attorney to get a free consultation. Just because the value of a home is going up, this doesn’t reduce the monthly payment on the mortgage(s). It also doesn’t change the fact that it’s a struggle every month to pay credit card minimums. And, it definitely doesn’t mean that household income exceeds expenses.
Rising property values don’t automatically erase financial problems. However, bankruptcy usually can. If you’re experiencing financial difficulties and own real property, don’t wait until it is too late. Call (714) 731-7595 today for a free consultation with a competent and qualified attorney.