Many people have voiced concerns over whether filing for protection under Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code will cause them to lose their homes. I found myself thinking recently about filing bankruptcy while owning a home, that this is a likely a concern about which many are worrying as they find themselves considering a bankruptcy filing.
When evaluating this issue, one should first determine the value of the home and the amount owed on any mortgages or other liens. The difference between these figures is the equity that you have in your home.
A debtor filing for bankruptcy protection may exempt the first $15,000 in equity, so a married couple filing jointly could exempt the first $30,000 of equity. Plus, you should factor in the transaction costs for selling the home (8-10% of the value of the home). If these figures do not exceed the amount of your equity, there is a chance that the U.S. Trustee might elect to sell the home and distribute the additional amount to unsecured creditors, so a Chapter 13 might be the better option.
To make this easier to understand, I will provide an example:
Mary and Jeff are filing for Chapter 7 bankruptcy protection, having recently gotten back on their feet after a long, difficult period of unemployment. They own a home that they could sell for $220,000, amd they owe $177,000 on their mortgage. They are worried that they will have to give up their home if they file for bankruptcy. Understanding that in the event of a sale of the home, the U.S. Trustee will incur around 8% in expenses (title charges, tax credits, realtor fees), the Trustee will only realize around $202,400 from the sale. After paying the mortgage lender, there will be $25,400 remaining, less than the $30,000 in exemptions that may be asserted by Mary and Jeff. Thus, the Trustee is unlikely to sell the home, since no funds would remain to distribute to creditors by a comfortable margin.
After the real estate downturn, most homeowners are able to retain their homes after filing for bankruptcy.
I’ve found that some of the happiest clients I’ve had are those that have taken advantage of the fresh start that the Bankruptcy Code provides. For free initial consultation regarding your particular circumstances, call The Law Office of Matthew Robinson in Geneva, IL at (630) 402-0850.