How much is your home worth? For people who are facing catastrophic debt, a bankruptcy can sometimes be the only solution. But the question posed at the top of this article can be critical for homeowners. Many people in San Jose and the Bay Area have seen their home values rebound from the recession. A lot of those same people have not seen a corresponding rise in their wages. Therefore, debt can still cause problems that require a bankruptcy solution. So how does the value of your home play a role?
Simple- sort of. If you are still below water on your home, then you are not going to face many difficulties in bankruptcy. The Bankruptcy Code is looking for equity. So if you have no equity, then the bankruptcy court will let your bankruptcy go through smoothly, either in Chapter 7 or Chapter 13. I need to insert one caveat here about being below water, as explained more fully under the Chapter 13 section. If you have a second mortgage and your home value is low enough, a Chapter 13 is going to allow you to strip off that second mortgage whereas a Chapter 7 will not. So if you have a second mortgage, think twice about a Chapter 7 as you may be able to save tens of thousands of dollars by filing Chapter 13 instead.
But for the most part, people with no equity in their homes are safe. People with equity will have to rely on their exemptions to protect their homes. Let’s talk examples. Let’s say Zillow puts your home at $700,000 and your first mortgage is at $620,000. Now we’ve talked elsewhere about the exemptions. Depending on your age and your situation, the 704 exemption scheme will allow you to protect between $75,000 and $175,000 in equity. We have heard rumblings about increasing this number, but as of the date of this writing, these numbers are still accurate.
So, in this situation, with $80,000 in equity, a person who can protect $75,000 will have $5,000 unprotected, or un-exempt. The Code specifies that this amount of money needs to be paid to your creditors in order for you to be eligible for discharge. Is there anything that can be done here? We hope so.
What my first approach would be is to challenge the value that zillow has placed on your home. Zillow is not always a reliable indicator of your home’s value. Perhaps there are necessary repairs that must be made. These assertions can be backed up by a real estate broker’s documented opinion or by an actual appraisal. The $5,000 that we could not protect above can be evaporated by determining a more realistic value of the home. Therefore, you would be able to fit under the exemption allowed.
Another tact many of the best Chapter 7 bankruptcy attorneys will use is cost of sale. Let’s face it, if your home is worth $700,000 and you owe $620,000, there is not going to be $80,000 left over. There is the cost of sale, which can normally be calculated between 6-8%. This too would eliminate that excess equity in your home. The bottom line is that good bankruptcy lawyers are going to help you massage your way through this process to ensure you get the best possible result in the bankruptcy court.