A common question that our office receives from homeowners when they are considering their options stems around their home. What will happen with my house?! I want to keep my house---is the bankruptcy court going to sell my house?! I want to file bankruptcy but can’t lose my house---can you help me?!
All of these are legitimate questions that all have the same answer: IT DEPENDS! Keeping a home through your bankruptcy possible is definitely possible but it depends on the chapter you are filing and the facts of your specific case. In some cases, the court appointed trustee will sell your home. In some cases, the mortgage company will request permission from the Judge to foreclose on your house even though you filed for bankruptcy. But on the flip side, some cases allow the person to keep their home and protect it from the court appointed trustee and any creditor looking to foreclose on that home.
The answer to the above question needs to be addressed prior to you filing the actual bankruptcy case. Once you file, for better or worse, it’s sometimes too late to change your mind. This is why it’s absolutely crucial that you speak with a knowledgeable bankruptcy attorney prior to making any decision. Contact our office by calling 916-800-7690 and schedule your free consultation today!
Primary Residence in a Chapter 7 Bankruptcy Filing
The basic philosophy in a Chapter 7 bankruptcy filing is for the court appointed trustee to liquidate the person’s un-exempted assets and use those proceeds for the benefit of the unsecured creditors in the case. Any asset that is exempted, the trustee does not have the legal authority to liquidate. Thus, the answer to the question of “Is the bankruptcy court going to sell my house if I file for chapter 7 bankruptcy?” boils down to this: If you are able to exempt the equity in your home, the house will not be sold; if you are unable to exempt the equity in your home, the trustee can, and most likely will, sell your home.
How much equity can I exempt in my Chapter 7 Bankruptcy Filing?
Exemptions are a crucial area of fully understanding bankruptcy law. Even though bankruptcy law is considered a federal law and ultimately the case is filed in federal court, the exemptions are based on state law. Thus, our discussion will be based solely on exemptions in the state of California.
California technically has two separate exemption schemes, commonly referred to as 703 exemptions and 704 exemptions. Since we are discussing homes and the equity in homes, we will focus our attention on the 704 exemptions because these are the exemptions that are commonly used when a home is being considered.
Beginning January 1, 2021, the amount of exemption allowed on a home saw a major change. Prior to that, the exemptions were as followed (summarized): $75,000.00 exemption if you were a single person; $100,000.00 exemption if you were a married person; and $175,000.00 exemption if you were over the age of 65 or physically/mentally disabled. While these exemption amounts seemed like a lot of money, with the rising real estate market in California, a lot of homeowners were unable to protect their homes when filing for chapter 7 relief.
As of the above date, the 704 exemptions dealing with the home changed to the following: You are able to exempt the higher of $300,000.00 or an amount equal to the median sales price of homes in that county for the prior calendar year, capped at $600,000.00. This sounds confusing at first read so let’s look at a few examples:
Example 1
Person A files for Chapter 7 Bankruptcy. The median sales price for the prior calendar year in the county Person A resides was $500,000.00. Person A owns a home worth $800,000.00. Person A owes $400,000.00 on their mortgage. Here, person A would get to use the higher of $300,000.00 vs. $500,000.00 (median sales price in this county for the prior calendar year), which is obviously $500,000.00. Thus, Person A is fully protected up to $900,000.00 ($400,000.00 mortgage balance + $500,000.00 exemption = $900,000.00. Since the home is only worth $800,000.00, the house is fully exempt and the trustee is unable to liquidate the property.
Example 2
Person B files for Chapter 7 Bankruptcy. The median sales price for the prior calendar year in the county Person B resides was $250,000.00. Person B owns a home worth $800,000.00. Person B owes $400,000.00 on their mortgage. Here, person B would get to use the higher of $300,000.00 vs. $250,000.00 (median sales price in this county for the prior calendar year), which is obviously $300,000.00. Thus, Person B is protected up to $700,000.00 ($400,000.00 mortgage balance + $300,000.00 exemption = $700,000.00. Since the home is actually worth $800,000.00, there still remains $100,000.00 of equity above and beyond the exemption amount. In this situation, the court appointed trustee would be able sell Person B’s home. Using those same figures above, the house would be sold for $800,000.00, the mortgage of $400,000 would be paid off, $300,000.00 would go to Person B due to their exemption, and the remaining $100,000.00 would then be used to pay the unsecured creditors in the case. There would obviously be fees that would need to be calculated (realtor fees, closing costs, trustee fee, etc.) but to keep the math simple, we did not factor in fees in the above example.
As you can see above with exemptions and the house, whether you get to protect it or not is dependent on whether you can protect the equity with your state exemptions. This same factor applies to your other assets too---cars, stocks, jewelry, etc. Please contact our office at 916-800-7690 immediately for a full evaluation of your case!
Primary Residence in a Chapter 13 Bankruptcy Filing
The process of Chapter 13 is much different than that of a Chapter 7. In a Chapter 13, the person filing is entering into a court administered payment plan to pay certain debts back over 3-5 years. No liquidation occurs. Thus, regardless of the amount of equity in a person’s home, the trustee will not be selling the home. However, the exemptions do still play a crucial role in what will happen to the home.
How much equity can I protect in my Chapter 13 Bankruptcy Filing?
Our discussion will focus only on how the exemptions work in the context of a home in the chapter 13. In a chapter 13 payment plan, the person filing is required to pay a certain amount of money to the general unsecured creditors (i.e. credit cards, medical bills, etc.). Some people can qualify to pay 0% to this group of creditors, meaning their repayment plan will propose to pay none of that debt. In some cases, a person might qualify to pay 40% of the general unsecured creditors, meaning of the entire amount of general unsecured creditors, this person will propose to pay 40% of the total balance. Going all the way to the other end of the spectrum, some people would be required to pay 100% of the general unsecured creditor balance, meaning they pay every penny of it.
Exemptions come into play because a portion of the analysis to determine how much the person is required to pay is centered on how much un-exempt equity there is. Let’s use both of the two above examples above.
In example 1, there is $0.00 of un-exempt equity in the home. Since there is $0.00 of un-exempt equity in the home, this person would not be required to pay any money to the general unsecured creditors (without looking at other factors, such as income). Let’s say this person has $250,000.00 of general unsecured debt, he/she would propose a chapter 13 plan wherein they are not paying any of that debt in the chapter 13 case.
In example 2, there is actually $100,000.00 of un-exempt equity in the home. Since there is $100,000.00 of un-exempt equity in the home, this person would be required to pay at least $100,000.00 to his/her general unsecured debt. Let’s again assume this person has $250,000.00 of general unsecured debt, he/she would need to propose a plan wherein he/she pays $100,000.00 of the $250,000.00 of general unsecured debt. This would be considered a 40% plan.
Thus, in example one, Person 1 is (assuming their plan is successfully completed) discharging the entire $250,000.00 of general unsecured debt. On the other hand, Person 2 in example 2 is discharging $150,000.00 of the general unsecured debt and paying the remaining $100,000.00 in his/her chapter 13 plan.
Exemptions, regardless if you are filing for chapter 7 or chapter 13, are extremely crucial in the bankruptcy analysis. Please contact our office at 916-800-7690 immediately to discuss what would happen to your house if you file bankruptcy.
