Can the Equity in My Home Force Me to Sell During Bankruptcy?

When debts are insurmountable, one option is bankruptcy. Bankruptcy takes place in federal courts, and it gives debtors a new financial start in life by reorganizing or discharging debts. One concern for those facing bankruptcy is the status of their existing home and whether the courts will force a sale of the property. There are several factors to consider in regard to keeping the home. One is the status with the lien holder on the property. Another consideration is the amount of equity the debtor has in the property.

Bankruptcy

There are different types of bankruptcies, such as Chapter 7, which is geared toward liquidation, or Chapter 11, which is intended for reorganization of debts. Debts discharged in bankruptcy don’t generally include mortgage loans, as the property secures the debt. It is possible you can stay in your home during and after bankruptcy, if you continue to make your mortgage payment. However, if you have sufficient equity in the home, it is possible the court will force you to sell the property.

Equity

Equity is the difference between the amount you owe on the property and what the property is worth in the current market. If your home is currently worth $500,000 and your owe $100,000 on the property, you have $400,000 in equity. Depending on the amount of your unsecured debt and the type of bankruptcy you filed, the court might force you to sell the property and use the equity amount to pay off creditors.

Homestead Exemption

If you qualify for a homestead exemption, you can protect a portion of your equity after the court sells the property. Depending on the amount of your equity and the amount of your homestead exemption, it is possible the court will decide there is no reason to force a sale, as there may not be sufficient funds left after paying off the holder of the mortgage lien and your exemption amount to warrant a sale.

Vary By State

All but three states have homestead exemptions. The three states without homestead exemptions are Maryland, New Jersey and Pennsylvania. In some states, a homestead exemption is automatic, while other states require you to file for your exemption. The exemption amount and how it is calculated vary widely from state to state. Depending on the state’s homestead laws, the exemption amount might apply to the entire equity amount, a specific amount, a percentage amount or some other form of calculation.

References

• "Modern Real Estate Practice"; Fillmore Galaty, et al.; 2006
• United States Courts: Bankruptcy Basics
• “How to File for Chapter 7 Bankruptcy”; Stephen Elias, et al.; 2009