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Protecting Your Home Equity and Bankruptcy

Many who find themselves in financial straits worry about the fact that they have worked hard to purchase a home and pay substantial sums of money towards paying off the loan so they could own outright. When the time comes that you realize that you are about to be sued for nonpayment, the first thing on your mind will probably be the fact that you simply don’t want to lose your home. You will want to fully understand the rule with your home equity and bankruptcy before you file.

If you find yourself worrying that you will lose your home for nonpayment, consider the potential benefits of Chapter 7 bankruptcy.

This type of bankruptcy allows filers to wipe out their debt while keeping property. It’s possible to easily protect the equity in your home through Chapter 7. Please note that it is even more important that you consult with an attorney before filing for bankruptcy if you have equity in your home. You’ll need to be absolutely sure that your home equity doesn’t exceed the legal limitations provided by California bankruptcy law.

If you consult with an experienced southern California bankruptcy attorney and find that you do have too much equity to protect with Chapter 7 bankruptcy, you still have a couple options.

Option 1: Chapter 13 Bankruptcy

The Chapter 13 bankruptcy is often referred to as the reorganization bankruptcy. Filing for Chapter 13 results in a repayment plan set over the course of 36 to 60 months (determined by the bankruptcy court). Depending upon your situation, the repayment plan can cover all or some of your debt (the remaining portion not included in the repayment plan would be discharged).

Example: Chapter 13 Bankruptcy Case

Joe Smith needs to file for bankruptcy. He has $200,000 in equity in their home (primary residence). But state bankruptcy law exemptions will only allow Joe to protect up to $150,000 worth of equity. To qualify for bankruptcy protection, Joe Smith would need to pay back $50,000 that exceeds the limitations.

Option 2: Creditor Lawsuits and Liens

If you are considering your options because you can’t afford to pay anything other than your mortgage payment, you obviously aren’t paying any other debts. If that’s the case, the creditors holding the debts you failed to pay on as agreed will sue you for payment. They will get a judgment and place a judgment lien against your property. The lien will stay in place until the debt is cleared through payment of the debt or the sale of the property. If you find yourself in this particular situation, you need to contact a collection attorney in your area. You could find the situation quickly escalating with the creditor attempting to force the sale of your home after the lien is in place. In some states, law prohibits this action, but you should verify that with a collection attorney who can explain the probability that you could find yourself losing your home to creditor pressure.

It sounds like a horrifying situation, but in some cases, you might find that having a creditor place a lien against the property is a good thing. It sounds ridiculous, but it’s true. You can’t pay the debts in question. If you can verify that in your state, the creditor is not able to force the sale of your home, you can depend upon one very important thing. You can stay in the home while the lien is against your house. The lien against your home would keep growing according to a judicially set interest rate until it’s paid, but you won’t have to worry about losing your home.

Option 3: Refinance

You may remember stories of friends, family members or neighbors who refinanced their home in order to pay off creditors. In today’s lending environment, most find this option unavailable. At best, it’s very difficult to successfully pull it off. This type of lending is simply becoming less and less available as lenders are less willing to lend to consumers with credit that doesn’t meet high standards. Individuals in this situation will find that accessing their equity in order to pay off debt is nearly impossible.

In addition to the three options discussed above, there’s one other option that you may be considering that I would strongly caution against: transferring the property into a trust or out of your name entirely. This is more difficult than it sounds. Once you are sued for nonpayment, the creditor attempting to be repaid for debt will still eventually gain access to the property because you intentionally tried to hinder the process. This particular action, while sounding and appearing legitimate will actually be viewed as defrauding the creditor of their right to collect on a debt. You can’t simply transfer property out of your name to avoid claims presented by creditors.

Others attempt to protect themselves by having a friend place a lien on the property before they file their bankruptcy petition. The lien uses up the unprotected equity amount. It sounds convenient, but it rarely works. The bankruptcy trustee assigned to your case will ask questions. They’ll want to know what you did with the money. They’ll ask you when the lien was placed on the property. If you were going to attempt to successfully use this maneuver, you’d need to first consult with an experienced bankruptcy attorney to cover all your bases. It might be possible, but you’ll want someone with experience on your side.

If you need additional information on chapter 7 bankruptcy, chapter 13 bankruptcy or other options to protect your home, contact the southern California bankruptcy attorneys at Westgate Law.

About the Author

Justin Harelik

Justin has a singular goal: to get people out of financial distress and move them to financial stability and prosperity. He does this by combining 15 years of in-depth experience in bankruptcy, credit management, debt negotiation and student loan modifications, and he does it with both English and Spanish-speaking clients.

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