Bankruptcy and equity in your home Part 1: What is equity?

Attorneys, paralegals and other legal and real estate professionals use the term "equity' regularly when talking about property. We forget not everyone knows the word or understands the concept. Some of my clients know what it is when I use the word, others quickly grasp the concept after I explain it, and some people are just too distracted by everything going on to fully grasp the concept and rely on us and the documents we present to calculate equity.

The equity in your home is the value of the property less the balance of the mortgage. So if your home is worth $100,000 and you still owe $80,000 on your mortgage, the equity in your home is $20,000 ($100K value of the home - $80K remaining on the mortgage = $20K you actually own in your home). Pretty simple, right?

What is the value of a home? Unless someone really negotiates a sale, we cannot "know" the true value. So we need to estimate value. One method is to use the real estate estimator sites on the internet. They can work well, and fortunately in this district, the trustees will normally accept an estimate from a better known site.

If the client thinks the real estate websites are off on their estimates, a person can ask a realtor to draft a market analysis. This is a more detailed review of the home and the area market for homes. Finally, a trustee may require a debtor to obtain a complete appraisal by a real estate professional. An appraisal can cost a few hundred dollars. This is the most detailed report on a home.

Once you have a value you believe to be accurate, you subtract the balance left on your mortgage from the value and you will have your equity ... basically the amount of your home you own or amount of money you would receive if you sold your home and paid off your mortgage. But, in a bankruptcy, we take one more step. We may be able to subtract the amount of money it would cost to sell the home. In this district, we can usually subtract 6% as an estimate of the real estate agent commission and other closing costs. 

This final figure is important because a debtor may only be able to keep a certain amount of the equity through an exemption. Because a person may limited to a certain amount they can keep or exempt, it is important to keep the estimated value appropriately lower to lessen the risk of not being able to exempt all the equity. The result of these calculations will be part of the decision of what chapter (7 or 13) to file under in a bankruptcy.  
   
If you want assistance, legal representation, or just want to know more about Mark Medvesky or our firm of Wells, Hoffman, Holloway & Medvesky LLP, check out our website at www.whhmlaw.com or call us a 215-660-3170 and schedule an appointment.

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