One of the most common questions that I am asked when I sit down with prospective bankruptcy clients living in the greater Bay Area region of California is “Can I keep my house if I file bankruptcy?” In most situations, the answer is “yes” – the house can be exempted so that it is left unaffected despite the bankruptcy filing. The outstanding mortgage must be paid before, during, and after the bankruptcy. For a better understanding let’s look into the nuances of exemptions for those filing for bankruptcy relief in California.
Whether you file for chapter 7 bankruptcy relief or for chapter 13 bankruptcy relief, bankruptcy law allows you to keep certain assets (called “exempt assets”).
Non-exempt assets need proper pre-bankruptcy planning to avoid them being turned over to a bankruptcy trustee and sold for the benefit of your creditors in a chapter 7 or alternatively making you pay more than you want to in a chapter 13. Most people considering bankruptcy should have some general idea about what they are allowed to keep.
In situations where a prospective bankruptcy debtor owns a home and the home has some equity then the most common set of exemptions used is referred to as the “704” Exemptions, a term derived from the number of the Code section in the California Code of Civil Procedure in which they are enumerated (C.C.P. §704.110 et. seq).
The California homestead exemption under this Set is as follows:
Homestead – Covers equity in a primary residence up to a maximum amount of $678,391. The exact amount depends on countywide median sale price for a single-family home. In the Bay Area most debtors will be entitled to the maximum exemption amount as the median sale price is higher than $678,391. Equity is calculated by taking the market value and subtracting outstanding mortgages and liens. The property must be your residence which means you actually live there or intend to return and make it your residence. Commercia, rental or vacation properties are not protected by the homestead exemption.
An example can best illustrate the situation:
Ted owns a house in Danville, California. He estimates its fair market value to be $1,300,000. His outstanding mortgage balance is $800,000. He is current with the mortgage and wants to keep the house as he resides there. When he files for bankruptcy relief, he would rely on the homestead exemption and would be able to deduct the full amount of equity in the property: $500,000 ($1,300,000 – $800,000). He would just continue to make his regular monthly payment and the bankruptcy would have no impact on his residence or the outstanding mortgage.
Keeping your home is often the biggest worry about filing for bankruptcy – and which Chapter to file for.
What Controls Keeping My Home After Bankruptcy?
The decision to declare bankruptcy often comes at an overwhelming time of your life. If you’re thinking about declaring bankruptcy, the chances are that you’re worried about how you can manage all your finances now and in the future.
There are three factors that determine whether you can keep your home in bankruptcy proceedings:
- The Chapter of bankruptcy you file
- How much equity you have paid into your mortgage
- If you can afford your monthly mortgage payments while facing debt
Consider the Type of Bankruptcy You File
There are two types of bankruptcies to choose from: Chapter 7 and Chapter 13. There are many differences between the two, but the major difference has to do with the exemptions to which you are entitled.
The federal government assumes:
- Everyone must try to pay off their debt
- If someone has “excessive” property they should sell it to pay off their debt
However, bankruptcy is designed to give you a fresh start, not to leave you impoverished. The federal and state governments often have exemptions (here are the California bankruptcy exemptions). This means that if your property is worth less than a particular dollar amount, you can keep it.
In general, Chapter 7 exemptions are much lower, stricter, and offer less flexibility than Chapter 13 exemptions. So if you file a Chapter 13 bankruptcy, you are much more likely to keep your house than if you file a Chapter 7.
Consider the Equity You Have in Your House
Don’t worry, Chapter 7 filers, there are still ways you can keep your house. When deciding whether your house is exempt under Chapter 7, the trustee only considers the equity in your house.
Equity is the market value of your house minus the balance on your mortgages or home equity loans. Many bankruptcy filers have little or negative equity in their houses, so their houses are exempt and need not be sold in the bankruptcy process.
However, if you have equity in your home over the exemption limit, you may be forced to sell your house to pay your debt or “buy it back” by paying the trustee the value of your house.
Consider if You Can Afford Your Mortgage Every Month
If you kept your house throughout the bankruptcy process, you are free to keep your home after the bankruptcy – as long as you continue to pay the mortgage.
It may be that after you are free of all the rest of your debt you will be able to afford the mortgage payments easily. If so, you’ll be able to keep your house.
However, if your income will not allow you to make your mortgage payments, the bank may eventually foreclose on your home.
Bankruptcy filers in this situation must carefully consider whether they want to keep their home, since bankruptcy gives them a unique opportunity to just walk away from the house and mortgage with no additional consequences, in most cases. It may also be easier to get your financial life under control if you are not burdened by large monthly mortgage payments.
Let an Attorney Help You Keep Your Home After a Bankruptcy
The decision to declare bankruptcy often comes at an overwhelming time of your life. If you’re thinking about declaring bankruptcy, the chances are that you’re worried about how you can manage all your finances now and in the future.
If you’re caught in a financial tailspin a professional can help you identify the right steps to take, even if you’re facing the prospect of losing your home.
Contact a local bankruptcy attorney, who can help develop a personal plan to get your balance sheet back out of the red.