Before filing for bankruptcy, you’ll want to educate yourself on the laws concerning home equity and filing for bankruptcy.
Due to the limitations on how much of your home’s equity can be protected through Chapter 7 bankruptcy (limitations vary by state), some bankruptcy petitioners find themselves in need of some cold hard cash in order to save their home. Most who are filing for bankruptcy, don’t have the kind of cash that would be required in this situation. Some attempt to borrow the money from short-term lenders, or “hard money” lenders, who loan boney based on collateral alone with no credence given for credit or income. Some people refer to this type of lender as a “loan shark” because the loan comes with abnormally high rates and excessive fees. This is an option, and if it becomes necessary, you should be able to find a lender who will provide you with the funds you require (albeit with the aforementioned high rates and fees).
The exemption that provides bankruptcy petitioners with protection for the equity in their homes is referred to as your “homestead exemption.” In Florida, bankruptcy petitioners can protect all the equity in their home. In California the protection for home equity during bankruptcy is limited to $75,000-175,000. Depending upon where you file for bankruptcy and how much equity you have in your home, the bankruptcy trustee may require that you come up with the cash to cover the amount of equity you have in your home that exceeds the limited protection provided by bankruptcy law.
When this happens, the trustee will require that you turn over the equivalent in cash or they will sell the home in order to recover those funds over the amount of equity that is protected by bankruptcy law. In this situation, the petitioner must determine which option is going to cost less. If you do not provide the required cash, the property will be sold to the highest bidder. The petitioner would receive their homestead exemption amount first and the trustee would take the remainder and distribute it amongst the creditors.
For example:
- Cindy Johnson is a resident of a state that provides protection for up to $100,000 in equity.
- Her house sells for $150,000 after cost of sale.
- The trustee will issue Cindy Johnson $100,000 first, the remainder of the sale price will be used to pay Cindy’s creditors.
- After creditor payments and trustee fees, Cindy will receive any remaining funds.
If you find yourself in a similar situation regarding home equity and bankruptcy, consider the likely sale price of the home, and any potential fees and points to the lender a short-term, hard money loan would cost you. Generally speaking, it is best to attempt to sell your own home rather than see it auctioned off through the bankruptcy trustee, but it might not be worth the costs associated with a hard money loan. The trick in this situation is to weight the financial costs of your options and pick the one that will be to your advantage. It’s possible you could lose your home while eliminating your debt…the trick is determining if obtaining the discharge of debt is worth the cost.
If you still have questions about the limitations on home equity protection according to bankruptcy laws in your state call the southern California bankruptcy experts at Westgate Law.