Ok, so let’s see if we can’t help to explain how a small part of bankruptcy works. You see, some many people need a bankruptcy to help them get a fresh start. Almost everyone is one slip away from needing a bankruptcy to reset their financial affairs. Particularly here in San Jose, where the housing market is insane.
Some people have more complicated situations than others, naturally. If you come into bankruptcy with literally no assets, then your case should go smoothly. Some people will come into bankruptcy for the specific goal of protecting their home.
The question becomes whether they need to claim an exemption for their home. You see, if your home has equity, all of a sudden it becomes a bit more interesting to the bankruptcy court. The Bankruptcy Court puts everyone through a sort of test to see whether or not your creditors deserve any money. It basically says if you file bankruptcy with a million dollars in the bank, you probably should pay back something. How much you have to pay back depends on the assets you have and whether you can exempt them all.
Most people have nothing to worry about because the exemptions are generous enough and people don’t end up thinking about bankruptcy until the very end. But if you have equity in your home, you better understand your exemptions. You have two exemption systems to choose from, 704 and 703. 703’s are generally preferable unless you have some equity in your home. If you have, let’s say $10,000 in equity, then we’re probably ok using 703’s. We start talking about more equity, you’re going to want to use 704’s to protect your home’s equity.
Under 704’s, a homeowner can exempt $75,000 in equity. Therefore, if you have $60,000 in equity in your home, 704’s should be able to shield that equity from your creditors. Think of your exemptions like a blanket that covers your assets. The only question is whether the blanket is big enough to cover all of your assets or whether your feet or arms will be hanging out.
If a family member lives with you, 704’s allow you to protect up to $100,000 in equity. And if you are 65, disabled, or over 55 with limited income, the exemption amount is increased to $175,000.
So, people with equity can file Chapter 7 and protect their house through a Chapter 7. This is not legal advice of course, so don’t go reading too much into this article. What’s important to remember is that this is serious business. Chapter 7 is a minefield and if you try to go through this alone, you could end up in real trouble. Years of bankruptcy practice has taught me alot. I’m sharing some of my education here on this website, but there is much more stored in this rather large cranium I have. Don’t go it alone.