Hesitancy to file for bankruptcy is very common especially for those who own assets that they would like to protect. Many homeowners own homes that are underwater or have negative equity, meaning that the loan on the home is more than the price that the home would sell for in the market today. Other homeowners may have some valuable equity in their homes. Bankruptcy has equity exemptions (also known as homestead) that will allow you to keep your home even if it has positive equity.
Equity exemptions under the bankruptcy code are as follows:
1. If you are a single person filing for bankruptcy, $75,000 of home equity can be exempted.
2. If you are a family (more than one person) filing for bankruptcy, $100,000 of home equity can be exempted.
3. If you are 65 or older, $175,000 of home equity can be exempted.
To be clear, an exemption allows the person(s) filing for bankruptcy to keep the equity in their homes up to the limitations listed above. So, if you fall under any of the categories above, you will be allowed to keep your home.
We can illustrate further with an example.
Our fictional clients, John and Jane Smith, own a home. The outstanding loan on John and Jane’s home is $200,000. The house was recently appraised by a real estate appraiser at a value of $280,000. This means that John and Jane have $80,000 of equity in their home because the home is worth $80,000 more than the loan they have on their home.
John and Jane have $75,000 of unsecured debt which they can no longer afford to pay. They would like to file for bankruptcy, but they are afraid that since they own a home, they may be forced to sell the home in the bankruptcy. John and Jane are 40 years old. Since John and Jane are married and live together, they are considered a family. A family can exempt up to $100,000 of equity in their home under the bankruptcy code. They have $80,000 of equity in their home. As a result of the bankruptcy exemption, John and Jane can file for bankruptcy and continue to live in their home and keep their home. The home will be unaffected through the bankruptcy process.
If John was single and did not live with any other family members and he had $80,000 in equity in his home, he is over the exemption limit of $75,000 for real estate equity. The bankruptcy court could technically force him to sell his home, but, in practice, it is very unlikely that the bankruptcy court would sell his home because the real estate broker or agent fees will very likely cost more than the proceeds they would receive to distribute to creditors. The bankruptcy code is written as a guideline for the bankruptcy court to follow. As you can see in this last variation of John’s situation, the translation of these rules in practical use requires the experience of an attorney to know how they really apply all of the rules.
Bankruptcy Law Professionals is a leading Southern California bankruptcy law firm. We have offices in Riverside, La Mirada, and Tustin. Contact us at (855) 257-7671 to ask questions or schedule an appointment.