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Your Home and Bankruptcy

Home ownership and Chapter 7 can be a dangerous situation. This is particularly true here in the Bay Area with a real estate market that can be downright insane. Mind you, that Chapter 7 can be a minefield and if you go into a Chapter 7 and you have not properly considered certain essential facts about your situation, you could be in for a rude awakening.

Now, it is safe to say that many many people have filed Chapter 7 while owning a home and everything goes fine. If you do not have equity in your home, then it is likely a Chapter 7 will not create any trouble.

The real issue for people in Chapter 7 when they own a home is when we start to see equity. And in San Jose, this is starting to become more of a concern. The real estate market has bounced back some. People now feel as though the values of their home may be increasing. Can they still file for Chapter 7? It depends.

You see in bankruptcy, we have these things called exemptions. You get to claim these exemptions to protect your property from your creditors. Imagine you owe $50,000 in credit card debt and $50,000 in medical bills. These debts are enormous, and only the very wealthy among us will be able to get out from debt this high without using the bankruptcy code. So here we are. But now imagine that you own a home that has $400,000 in equity. That would be nice. I hope you told your attorney about this before the case was filed.

See, for most people facing bankruptcy, they will have to choose between two sets of bankruptcy exemptions here in California. There is the 704 exemption scheme and the 703 exemption scheme. Generally speaking, 703’s are a bit better for folks as they provide a wild card exemption of more than $25,000 that can be used to cover odd things that can really add up. But in a case where there is significant equity in real estate, you are going to want to use the 704 exemptions.

The 704 exemptions allow a single person to protect $75,000 worth of equity in their home. That number rises to $100,000 if a family member lives with you in the home. That number rises to $175,000 if you are over 65, or if you are disabled or have limited income. Remember, this is all very general and you would be doing a really dumb thing if you were relying on this article to file your own Chapter 7. Your case requires a good attorney combing through the relevant facts. Do not try to do this at home.

But as you can see, the maximum amount you are allowed to exempt on your home in either exemption scheme is $175,000. In the situation discussed above, where the client had $400,000 in equity in her home, the Bankruptcy Code comes to the conclusion that she has equity in her home that can not be protected. When she files bankruptcy, she will have what is known as an asset case. This is because if the Trustee liquidates the assets of the case, and pays off the exemption amount claimed by the client, there will be money left over to pay the creditors.

This means that you should not file bankruptcy if you have close to $175,000 in equity in your home. There is a chance that the Trustee will try and sell your home so he can pay your creditors with the proceeds of the sale. Be careful! In this situation, a Chapter 13 is more likely to be of help so that your house is never at risk. This is an obvious course of action because there is so much equity in the clients’ home. What happens if the story is a bit closer?

Let’s say there is only $150,000 in equity in the house. IF the client is a senior citizen, then she would be able to protect $175,000 in equity. Therefore, in this case, the client would have enough room under the exemption code to protect her equity. In any normal situation, she should be able to make it through Chapter 7 without a problem. One note I would add here is that this is all dependent upon a couple of things. Because a Chapter 7 case is going to remain open for some time.

This is why you simply cannot try to do this on your own. So many Chapter 7 cases appear to be so easy. There are attorneys out there charging practically nothing for these legal matters. But what you need to understand is that if a Chapter 7 case goes wrong, it can go really really wrong. Many case can be open and shut in four months. In the situation we are currently discussing, the client with $150,000 in equity in her home may feel that she can file her case and get in and out of bankruptcy before her house goes up in value too much.

You see, if this home we are talking about is here in Sunnyvale, and Apple just announced it is going to build a high rise for new headquarters 3 blocks away, you could very well find that your case remains open mysteriously. You see, another factor that must be considered is that the value of your assets can go either up or down while your case is open. You will find that if the Trustee has a right to take your car, for instance, because it has too much equity, he is going to act rapidly to secure that vehicle. This is because cars rapidly depreciate in value over time. Homes, on the other hand generally have increased in value.

I have seen it before. A Chapter 7 Trustee has kept a case open for years, and then, there is equity available when there was none at the time the case was filed. Is there any way to avoid this? Yes there is. You see, what the client really needs to do in order to protect this house is to file a Motion to Compel Abandonment shortly after the case is filed.

This motion puts it in the judges’ hands to determine if there is any equity available to creditors. If the judge determines that there is no equity at the time the motion is brought, then he is likely to sign an order granting the Motion to Compel Abandonment filed by your attorney. This process is a bit difficult to explain. I can already here my web guy screaming at me about how complicated I have made this article. But I want it to be as clear as it can be: these things matter a great deal.

So much of the Bankruptcy market these days has an attorney competing on price. Whoever is the cheapest attorney often gets the client. I want to stand here and tell you that I feel this is a dangerous road this particular legal service industry has gone down. This stuff requires careful thought and analysis. And an attorney who has been through the battles enough to know how to protect your home in Chapter 7 while still getting you access to the tremendous amount of debt relief a Chapter 7 provides deserves to be compensated for his efforts.

People need the debt relief offered under the Bankruptcy Code. But in many situations, getting access to this relief requires competent counsel to guide you to safety. Yes, homeowners can file Chapter 7, but this process must not be taken lightly.

More to come.

Call Seabrook Law Offices at 408-703-1563 for a consultation today.