When a person files for Chapter 7 Bankruptcy, they are entitled to a homestead exemption. This amount differs from state to state. If the bankruptcy trustee determines that you have more equity in your home than is allowed, they are allowed to sell the home to the highest bidder, pay you your “homestead exemption” amount and distribute the funds above the homestead exemption amount to your creditors. If there are funds remaining, those funds revert back to you.
Let’s say that your home is worth $100,000 but your state only allows for $75,000 worth of value in your home. Then the trustee can sell the home, give you your $75,000 and take the remaining $25,000 to pay off creditors listed in the bankruptcy. You also have the option of coming up with the cash to pay the extra $25,000 and keep your home.
Many people are unable to come up with the money and need to sell their home quickly, but are unable to find a buyer. In this case, there are what we call hard money loans available – the old term for these people are “loan sharks” because they charge very high interest and fees for a short term loan. These loans are based on collateral only, thus your home is at risk if you cannot pay back the loan as agreed. You would be taking a risk here if your home does not sell in the allotted time given you by the bankruptcy court. It can become very complicated at this point. However, if this is your only option to try to save your home it might be worth the risk to you.
In filing a Chapter 7 bankruptcy to wipe out your debt, you only protect so much of your home’s equity. Each state allows you to protect different amounts of equity. In Florida and Nevada, you can protect all the equity in your home. In California, you can protect from $75,000 to $175,000 in equity. This is what we talked about previously as your “homestead exemption.”
If you have concerns regarding the “homestead exemption” of bankruptcy how it could affect you, please get in touch with one of the bankruptcy attorneys at southern California’s Westgate Law. We’d love to answer your questions.