“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 bankruptcy 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. The actual amounts depend 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 liens* 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 proceeding 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). **
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).*** 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.
* 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.
** 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.
*** 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
Image courtesy of james.thompson