Bankruptcy and equity in your home Part 2: How does equity impact my choices? Can you own too much of your home?

We all hear about homes being "underwater." That means the property is worth less than the debt/mortgage owed by the property owner. When that happens, the bankruptcy conversation revolves around the value of keeping the home. So what happens to the equity, the difference of the value above the debt, when a bankruptcy debtor owes less on their mortgage than the value of house?

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The answer is "it depends." Debtors are usually allow to keep some part of the equity. If the laws allow the debtors to keep all the value remaining in the house, the debtors usually can keep their home even through a Chapter 7 bankruptcy. Under federal law, a person can exempt, or keep, just about $24,000. If a debtor's equity is less than $24,000, he or she can probably keep the home, especially if they can afford it without the other debt. The protected amount can be as much as double for a married couple.

Under different state laws, homes can be exempt in different amounts including the entire amount in some cases. In Pennsylvania, married couples usually own their home in "Tenancy by the Entireties." It is the important the deed states the ownership correctly. If that is the case, the home may be protected. But the home is only protected if one member of the couple owes the debts. If that is the case, more than likely, the home can be protected in the bankruptcy in Pennsylvania. For other states, people need to check with a local bankruptcy attorney.

If a debtor finds they cannot completely protect his or her equity, some additional decisions need to be made. The first option may be to give the house up, or "surrender" the house in a Chapter 7 bankruptcy. If a debtor does that and he or she has a significant amount of equity in the home, the trustee will probably sell the home. If the trustee sells the home, the debtor keeps the exempt value of the home and the trustee pays the remaining proceeds will be paid to the creditors. Or, if the equity is not that much over the exemption, the trustee may just allow the bank to foreclose or the home, Many clients do not want to use this option.

The other option is to file for bankruptcy under Chapter 13. In order to use Chapter 13, a debtor must pay his or her creditors as much as they would get in a Chapter 7 bankruptcy. That means if a debtor has $40,000 of equity in a home, he or she can exempt $24,000 and that would leave $16,000 unprotected. Using Chapter 13 may allow you to keep your home through a payment plan. A debtor may be able to set up a plan to pay the remaining $16,000 over 3 - 5 years using Chapter 13.

This is a pretty basic explanation of how this might work. Any homeowner who is thinking about filing bankruptcy really needs to talk to an attorney and go through these steps. This will help make informed decisions.
 
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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