“A chair is still a chair
Even when there’s no one sitting there
But a chair is not a house
And a house is not a home
When there’s no one there to hold you tight,
And no one there you can kiss good night.”

-Burt Bacharach and Hal David

If there’s anything that is a centerpiece of an individuals’ bankruptcy case, it’s their house and whether they can keep and, if so, how?  I have many clients who call up and think that they automatically lose their home when they file a bankruptcy case.  I have others who believe that they get to keep their house under any circumstance.   The truth lies in between.

There are different options available regarding retaining property depending on which bankruptcy chapter is filed.

Keeping Your House in Chapter 7

In a Chapter 7 liquidation case, whether one gets to keep their house, or any other property for that matter, depends on how much equity is in it, and whether they have sufficient exemptions under applicable law to protect that equity value.    Exemptions are “protections” for value you have in certain assets such that they are “exempt” from collections.  Every state has different exemptions amounts available. Exemption laws are based on the state where you resided for the 2 years prior to filing your bankruptcy case or, if you lived in more than 1 state during that period, in the state where you resided for the greater part of the 180 days prior to that 2 year period.

How to Calculate Equity

How is equity calculated?  This is for some reason a big hurdle for many.  Calculating equity is simple.  You take the fair market value of the property (preferably from an appraisal, or at least a broker’s written opinion) and then subtract out the amounts owed to any mortgages or other liens¹ against the property, and that’s the equity.   In most courts, you can also subtract out another 8% of the fair market value for “costs of sale” of the property.

Assuming there is no equity, or you have sufficient exemptions to cover whatever equity exists, then the bankruptcy trustee will not sell (liquidate) the house.  However, there is still the obvious requirement that you must stay current with your contractually due mortgage payments in order to prevent foreclosure.

Keeping Your House in Chapter 13

Chapter 13 is very different.  You will not lose your house in a Chapter 13 regardless of how much equity there is in it.  However, any non-exempt equity will need to be paid to your creditors over the term of your repayment plan (36-60 months).  ²

Lien Stripping in Chapter 13 (and Chapter 11)

Another nifty feature of Chapter 13, not available (at least not yet) in a Chapter 7 bankruptcy case, is the ability to remove certain liens against real estate.   How and to what extent this can be done depends on a number of factors, including whether the house is the principal residence of the debtor.  If it is, then a junior mortgage can be “stripped” (i.e. removed) if the value of the property is less than the amount owed to any senior mortgages (e.g. the 1st mortgage). ³  For non-principal residences (such as a rental property),  even partially secured liens can be stripped down to the value of their lien.

Catch up on payments in Chapter 13 (and Chapter 11)

Another great feature of Chapter 13 is the ability to use your 36-60 month plan payments to catch up on past due amounts on your mortgage(s).  Frequently one files a Chapter 13 to gain the benefit of the automatic stay to stop a foreclosure, and then propose a repayment plan to catch up on the past due arrearages and reinstate the loan over a period of time.

But whether one gets to keep their house or not, they can always make another place their home because as the great songwriting team quoted at the top of this article point out, a house is not a home.

__________

¹ This excludes liens, such as judgment liens, when they are able to be removed in a bankruptcy case.  This will be discussed more in my Letter “L” blog.

² This isn’t precisely accurate.  Technically, in a Chapter 13 the debtor must pay more than the creditors would receive in a Chapter 7 case, so one gets to deduct anticipated Chapter 7 Trustee administration fees from the equation.

³ This may not be available in all bankruptcy courts, but is allowed in the Central District of California.

This article is part of my bankruptcy alphabet series

Others playing the Alphabet Game:

• Jay Fleischman believes that H is for Household
• Cathy Moran agrees that H is for House
• Cate Eranthe finds H to be about HOA  Dues
• Stuart Ing explains about Household Size
• Cleveland Attorney Bill Balena talks about Honesty
• Christopher McAvoy discusses Harassment
• Mitchell Goldstein examines Households
• Daniel Winter looks at Harrassment
• Kim Coleman-Hardship Discharge,
• Ryan Caldwell-Hearing,
• Jeena Cho-Home,
• Bob Doig-Homestead,
• Bret Nason-Honest But Unfortunate Debtor,
• Chris Carr-Honesty,
• Kurt O’Keefe-How much?
• Peter Behrmann-Household Median Income
• Christine Wilton–Hijacking

Image courtesy of james.thompson

On January 6, 2009, Senator Dick Durbin (D, IL) introduced Senate Bill 61 called the “Helping Families Save Their Homes in Bankruptcy Act of 2009.”   The bill has several provisions, which can be analyzed by following the above link, but the main purpose of the bill is to allow homeowners in a Chapter 13 bankruptcy case to reduce the amount of liens (mortgages) against their home down to the value of the home and modify the payments.  This is known as lien stripping in bankruptcy.

For example, if your home is worth $400,000 and you owe $350,000 to the First Mortgage and $100,000 to the second, you would theoretically be able to reduce the lien of the second mortgage down to $50,000, and then reamortize (modify) the payments based on that amount.  (The remaining $50,000 that was taken off would be treated as an unsecured claim and paid whatever percentage the other unsecured creditors were to receive in the case).

This is a potentially significant development and one can reasonably expect President Obama to sign this law if it passes both houses of Congress.  Check back often for the progress on this new legislation.