This is a topic I wrote about before but worth discussing again. In many cases, a family can keep their home in a chapter 7 bankruptcy case. One question is "how much equity do you have in your home?" Some people don't understand what "equity" is and others just don't know the values needed to calculate the equity. Equity is the full value of your home minus the balance of the mortgage (and second mortgage if you have one) owed on your home.For instance, if your home is worth $200,000.00 and your mortgage balance is $160,000.00; your equity is $40,000.00 ($200K - $160K = $40K). Basically, you own $40K of value in your home.
If your home is worth $200,000.00 and your first mortgage balance is $160,000.00 and you have a second mortgage of $20,000.00, you add the mortgages ($160K+$20K= $180K) and deduct that number for the value of the home ($200K - $180K = $20K). You own $20K of value in your home.
Bankruptcy law allows a debtor to exempt (protect or keep) a certain amount of value in their home. In the Eastern District of Pennsylvania, a couple can use bankruptcy law to keep a little over $50,000 of equity in their home. That means in both examples above, a couple filing bankruptcy that have $20K - $40K of equity in their home could keep their home in a chapter 7 bankruptcy case, providing they meet all the other requirements to file for chapter 7 protection.
One of the challenges people are facing today is the rapid increase of value that real estate is experiencing under the current market conditions. In Pennsylvania, home values have increased about 16% over the last year.
So, if your home was valued at $200,000.00 last year, your home may be worth $32,000.00 more for a total of $232,000.00. Using the examples above and let's say your mortgage balance last year was $160,000.00 and you paid down $10,000.00 on the principal of your mortgage. That means your mortgage balance is now $150,000.00.
Using the first example, the equity in your home is now $82,000 ($232K - $150K = $82K). Using the second example, the equity in your home is now $62,000.00 ($232K - $170K = $62K). In both examples your equity now exceeds the $50,000.00 exemption.
This is an oversimplification of the analysis needed. Other factors, like the cost to sell your home, to consider. If this is your concern, don't make a decision based on this article alone. Talk to a bankruptcy attorney for a more thorough review.
Also, for a married couple who own a home as husband and wife, there is another way to protect a home but that is a topic for another blog.
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.