Home | Archives | Blog | Bonds | Credit & Debt | Forex | Futures | Insurance | Mutual Funds | Options | Real Estate | Stocks | Taxes | Other Investment Topics | New Money Articles
(Note that this article is just to give the gist of how a homestead is treated in a Chapter 7 bankruptcy. There are various complexities not covered here, and shouldn’t be relied on for an actual filing.)
A Chapter 7 bankruptcy is a liquidation. The Chapter 7 bankruptcy petitioner is entitled to keep certain assets up to a certain value, which are called exemptions. The bankruptcy trustee sells everything else to pay unsecured creditors. To determine whether you can keep your home, you must figure out 3 things:
If the equity in your home is less than your exemption, then you can keep your home. If they are about equal, or if the home equity is a little more, then the costs of selling it would probably deter the trustee from selling it to pay creditors. If the equity is much more, then the trustee will sell your home, give you the amount of your exemption, and pay unsecured creditors after deducting her fee.
All of the following assumes that you are not behind in your mortgage payments, and are continuing to pay your mortgage. Otherwise, the bank (or other mortgage holder) can foreclose on your property. Because it is secured property, the automatic stay will not prevent this, so there would be no need to read further.
The 1st step you must take is to determine your home’s fair market value. If you recently gotten an appraisal, and real estate prices are not rising rapidly in your area, then you can use that. Otherwise, there are a few websites that can give you a good idea of your home’s worth, and can provide recent actual sales figures for comparable homes in your area. Some of the best include Zillow.com and SmartHomeBuy.com. If the equity in your home is close to your exemption amount, you might want to get estimated home values from several sites. Because in some areas, home prices are changing rapidly, it would be wise to determine your home’s fair market value right before you file for bankruptcy.
The 2nd step is to subtract all liens, if any, on your home from its fair market value. Liens can arise from 2nd mortgages, home equity loans, mechanics liens, court judgments, unpaid taxes, and child support debts.
If the remaining value is zero or less, or it is less than what it would cost to sell it, then you will not have to worry about losing your home, so you do not need to go any further.
If your total equity is less than the exemptions that you can apply, then you will still be able to keep your home.
The homestead exemption is the amount of equity that you can protect in a Chapter 7 bankruptcy, and is determined by state law, and which law you must apply will depend on where you were living for the past couple of years. Some states have a very large or unlimited exemption, and others have no homestead exemption at all—Pennsylvania, Maryland, Delaware, and New Jersey. In some states, you can choose federal exemptions or state exemptions. The homestead exemption in a few states depends only on lot size; in others, it depends on both lot size and equity, and in others, equity only. Some states require you to file a Declaration of Homestead at the county court in order to use that state’s homestead exemption.
In many states, you can also apply a wildcard exemption to your home. This is an exemption that can be applied to any property, but in some states, it is restricted to personal property, and can’t be used for your home. In any case, wildcard exemptions for most states are very small. The federal wildcard exemption, for instance, is only $975, and in Pennsylvania, it is only $300. (Why only $300? The law was enacted in 1849, when $300 was worth a great deal more than it is today, but, unfortunately for people filing in Pennsylvania, it has not been increased since then!)
In 18 states, a home can be owned by a couple as a tenancy by the entirety. In these states, the home can be completely protected if:
However, if both file, then the home is subjected to whatever rules applies to a joint filing by a married couple. In some states, or using the federal exemptions, a married couple filing jointly can double their homestead exemption and wildcard exemption.
Prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, many people would, before filing for bankruptcy, move to another state that had a more generous homestead exemption than the one they were living in. The new law has much stricter requirements as to which state’s home exemption you can use. However, if you live in a state that allows the choice of federal exemptions, then you can choose the federal exemptions regardless of how long you were living in the state.
If you lived in a state that allows you to choose the federal exemptions, and you wish to use the federal exemptions, then you may do so regardless of how long you have lived in the state.
If you have lived in your home for at least 40 months before filing, or if you have lived in your home for less than 40 months, but purchased it after selling another home in the same state that you lived in more than 40 months earlier, then you can use your current state’s exemption. However, if you have been convicted of a felony, a securities violation, or an intentional tort that caused severe bodily injury or death, then your homestead exemption may be limited to $125,000. If your state’s exemption is greater than this, then the judge will determine whether to apply the limit.
If you acquired your home within the previous 40 months and have lived in the state for at least 2 years, then you can use that state’s exemption up to $125,000.
If you have lived in your state for less than 2 years, then you must use the exemptions of the state—up to $125,000—in which you lived the longest in the 180 period before the 2 years before filing—in other words, in the time period of about 2 to 2 ½ years before filing for bankruptcy.
If you have disposed of any nonexempt assets in the 10 years before filing to protect it from creditors, then your exemption may be reduced by the value of the assets.
If your equity is greater than your exemption by an amount that’s at least enough to cover the cost of selling it and to make it worth the trustee’s time, then the trustee will sell it, pay you your exemption, take her commission, and distribute the rest to your unsecured creditors. If your state’s exemption depends on lot size, and your home occupies a larger lot than the exemption, then the trustee will sell the part not covered by the exemption.
To prevent this, you can offer to pay cash to the trustee for the nonexempt amount, or file or convert your case to a Chapter 13 bankruptcy. In a Chapter 13 bankruptcy, you repay at least 25% of your unsecured, nonpriority debts over a 3 or 5 year period instead of selling your assets. Thus, you’ll be able to keep your home and everything else in a Chapter 13 bankruptcy.
If you have not filed for bankruptcy yet, and you have considerable equity, you may be able to borrow money using the equity as security to pay off your debts. If, later on, you still end up filing for bankruptcy, then the equity in your home will be reduced, and may be protected by your exemption. If you live in a state with a generous exemption, but not long enough to take advantage of it, then attempting to pay off your debt with a home consolidation loan may take enough time to take advantage of your state’s exemption, if you would subsequently need to do so. Note, however, that you should do this in good faith, and, you should pay all your creditors what is due each month—otherwise it could be looked upon as a preferential treatment or bad faith, especially if you use the money to pay off creditors who are relatives. If you pay some creditors $600 or more, but not others, in the 90 days prior to filing, it could be looked upon as a preferential payment, and the trustee will get it back. Consult a bankruptcy attorney, or get more information if you decide to do this.
If you, and all other owners of the house, are at least 62 years old and it is your primary residence, then you may be able to get a reverse mortgage, which is a loan that you never have to pay back. The nonrecourse loan is repaid from the sale of the house after you die. For more information, see Reverse Mortgages.
New Bankruptcy Reform Evaluation Report
The Benefit Of Bankruptcy To Society
A Quick Overview Of Bankruptcy For Consumers
The Means Test In Bankruptcy—Is There A Presumption Of Abuse?
Credit Counseling and Debtor Education (Personal Financial Management Course)
Can Bankruptcy Prevent An Eviction For A Renter?
What Happens to your Home when you File for Chapter 7 Bankruptcy?
Credit Scores - A complete, but concise, illustrated tutorial about credit scores, especially the FICO score, and how to raise them.
Credit-Based Insurance Scores - How credit information is used to determine the insurance premiums charged to consumers.
Tenant Screening - A tutorial about the use of tenant screening companies by landlords and property managers to select whom to rent to.
Real Estate Short Sales - How to avoid foreclosure and bankruptcy by selling your property through a short sale.
Taxation of Canceled Debt - Taxes may be due on the canceled debt in a foreclosure or a short sale. This article explains what canceled debt is taxable, how to figure the tax, and how to possibly avoid it.
 | Custom Search |