Quite often, I receive a phone call asking, “If I file for Bankruptcy, will I lose my home?” Well, the short answer is — No, you will not lose your home if you plan accordingly. What does this mean.
Typically, most of my clients do not have enough equity in their home to worry about this issue. However, if you do have significant equity in your home, there may other options. Further, the bankruptcy laws permit individuals to protect a certain of equity in their home. This typically covers most of my clients.
However, if there is equity over and beyond the amount allowed to be protected under the bankruptcy laws, then we devise a plan to file either a Chapter 7 or Chapter 13. In a Chapter 7 scenario, we would need to have some money or a relative that would be willing to pay the amount of unprotected equity. In a Chapter 13 scenario, we would need to pay the amount of unprotected equity over a period of 3-5 years or 36-60 months.
Let’s look at some examples:
If our home is valued at $100,000.00 and we have a mortgage of $70,000.00, the typical analysis would be:
100,000.00 Value of Home
– 10,000.00 permitted 10% reduction for cost of sale
90,000.00 Value after 10 reduction for cost of sale
– 70,000.00 Amount of Mortgage
$20,000.00 Amount of Equity
The Bankruptcy Laws allow Protections or Exemptions depending upon your state. Because we are in New Jersey, we will be looking at the Federal Exemptions as they are available for New Jersey residents filing for Bankruptcy protection.
**Note** The exemption is available for each and every owner of the property. For example, each owner is allotted their own exemption.
Utilizing the above example, the house would be completely protected because 11 USC 522(d)(1) allows each individual homeowner to protect up to $25,150.00 of equity in their property. If the home is owned by a Husband and wife, they could each claim the $25,150 allowing them to protect a total of $50,300.00 of equity in their property.
As such, since there is only $20,000.00 of equity in the above example, a debtor in bankruptcy would claim an exemption of $20,000.00 which is less than the allotted amount permitted under the bankruptcy code.
Now let’s see a different example where the equity exceeds the exemption amount:
100,000.00 Value of Home
– 10,000.00 Cost of Sale permitted deduction
90,000.00 Value after 10% reduction for cost of sale
– 50,000.00 Balance owed on mortgage
$40,000.00 amount of equity in property
Now, if the house is individually owned, since the equity exceeds the exemption of $25,150.00 for an individual, there would be $14,850.00 of unprotected equity in the house.
**Note** If the property is jointly owned, the home would be protected since the $40,000.00 of equity is less than the combined exemption amount of $50,300.00. However, if the property is individually owned, the following analysis is applicable.
In order to protect this equity and still qualify for bankruptcy, the debtor filing bankruptcy would likely choose to file a Chapter 13. In the Chapter 13 Bankruptcy Scenario, the debtor would need to pay $14,850.00 to their unsecured creditors over a period of 3-5 years.
Why would someone choose to file for Chapter 13 and be required to pay this amount? Because if the debtor has $20,000 or $30,000 or $40,000 or more in unsecured debt, they would only be required to pay the $14,850 and discharge the balance of the debt upon completion of the plan. Further, in New Jersey, the debtor will not be paying interest on the debt. As such, the debtor would only have to repay a portion of the total unsecured debt.
If you would like to learn more or schedule an appointment, please feel free to contact us at 877-606-1222 or send us a message at our Contact page.
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