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Can I Keep My Home in California Bankruptcy?

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One of the most common questions that I am asked when I sit down with prospective business bankruptcy clients living in the greater Bay Area region of California is “Will my house be affected by the corporate business bankruptcy filing?”  In most situations, the answer is “no”.   The filing of a corporate business bankruptcy does not by itself mean that the real property is affected.  The residence, in general, would not be property of the bankruptcy estate.   As such, it would not be under the control of a bankruptcy trustee and not subject to the creditor claims of the business.  If the house is not affected by the corporate bankruptcy filing, the outstanding mortgage must be paid before, during, and after the business bankruptcy as normal.

There is one situation where the house could be affected: if a corporate creditor has a deed of trust on your house.  In rare instances, the owner of a business may have given a deed of trust on his or her residence to a corporate lender. For instance, the SBA in some situations has required a deed of trust on the owner’s real property to secure the business SBA loan. In these situations the house is not affected by the corporate bankruptcy filing so long at the outstanding obligation secured by the deed of trust is paid after the business bankruptcy is completed. The owner may not like the end result- he or she is paying on a business debt after a bankruptcy filing in order to prevent the foreclosure of the property.        

There is another situation where there could be some exposure to the owner of the bankrupt company – if the owner had personal liability/corporate guarantees and the creditor obtained a judgment lien against the property.   Here is an example of that situation:  Owner signs a personal guarantee of a business lease.  Company files bankruptcy and the lease is unpaid.  The landlord then sues the owner for non-payment.  If the landlord gets judgment, the landlord could lien the personal residence of the owner and could also attempt a sheriff’s sale of the real property (like a foreclosure).

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”).

There are protections to the business owner against general creditors: the homestead exemption.  For a better understanding let’s look into the nuances of the homestead exemption.  Non-exempt assets need proper planning to avoid them being lost to a judgment creditor and sold for the benefit of the creditor.  In California the residence is protected by a  common set of exemptions 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:

Homestead – Covers equity in a primary residence up to a maximum amount of $722,502. 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 $722,502.  Equity is calculated by taking the market value and subtracting outstanding mortgages and liens. The property must be your residence which means you physically reside there when the judgment was entered and you must have continually resided there.   Commercial, 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.  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 mortgage payment and his creditors would not be able to foreclose on his house.   

Keeping your home is often the biggest worry about filing for bankruptcy.  With proper planning most debtors can keep their home without any problems.

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 are worried about how you can manage all your finances now and in the future. There are two factors that determine whether you can keep your home in bankruptcy proceedings:

  • How much equity is in your residence
  • Whether 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 come into the bankruptcy process and intend to keep your home, you are free to keep your home after the bankruptcy – as long as you continue to pay the mortgage and related obligations such as property taxes, insurance, and HOA dues, if applicable.

Hopefully the bankruptcy freed you of all the rest of your debt so that you will then be able to afford the mortgage payments more easily and thereby keeping your house.   However, your income could change and you may not be able to afford your mortgage payments.  

Unless you work out an arrangement with the lender, the lender may eventually foreclose on your home. Bankruptcy filers in that 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 business bankruptcy often comes at an overwhelming time of your life.  If you're thinking about declaring business bankruptcy, the chances are that you're worried about how you can manage all your personal and business 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 certified specialist David A. Arietta, Esq. at (925) 472-8000. He is a local bankruptcy attorney, who can help develop a personal plan to get your balance sheet back out of the red.