Good things can come from your reduced home value if you file bankruptcy

In most regions of the country, home values are continuing to decline. For some homeowners there is a silver lining to this continuing bad news. IF you are considering filing bankruptcy, reduced home values have a number of good consequences in a bankruptcy case. Here are two of the most important ones. In my next blog, I’ll give you some more.

1. Keeping your home through a Chapter 7 case: If you are lucky enough to still have some equity in your home, it would more likely be protected from your creditors in a Chapter 7 case than even a year or two ago. You are only allowed a certain amount of equity, and with the ongoing downward slide in values, homes that were worth too much earlier may well no longer be.Also, as long as home values continue downward, the Chapter 7 trustee might be less inclined to claim your house even if there IS potentially too much equity in the house. That’s because by the time the property would actually be sold, it will likely be worth less, and perhaps less than your homestead exemption. The trustee cannot sell your house if, after paying you the homestead exemption amount, there would be no money left for your unsecured creditors.

 

2. Paying less, or in some cases nothing, to your unsecured creditors in a Chapter 13 case: In a Chapter 13 payment Plan, how much you must pay to your unsecured creditors is determined in part by the amount of equity in all your assets—including your home—beyond the applicable exemptions. One major reason people file Chapter 13 instead of Chapter 7 is to protect such “non-exempt assets.” A reduction in home value means that you would likely pay your unsecured creditors that much less.Example: say that two years ago you and your spouse owned a home worth $250,000, which had equity of $25,000 BEYOND the applicable homestead exemption. If that home lost 20% of its value since then—not unusual—it would now be worth about $200,000. Assuming that the mortgage and any other valid liens against the property did not change much, then this $50,000 reduction in value would mean that the remaining equity, if any, would be less than the homestead exemption. So, the Chapter 7 trustee would have no interest in taking the home from you. And in a Chapter 13 case, you would be able to protect your home without having to pay anything in your Plan to the unsecured creditors to do so.