Can I Keep My Home in California If I File for Bankruptcy?

Your home may be safe in a California bankruptcy.

California homeowners contemplating bankruptcy should understand that bankruptcy could potentially result in the loss of the home. Whether you will lose your home in bankruptcy or not depends on what type of bankruptcy you file, which set of state law exemptions you claim, and how much equity you have stored up in the home.

Types

California residents filing for bankruptcy generally can make the choice to file either liquidation bankruptcy under Chapter 7 of the U.S. Bankruptcy Code, or repayment bankruptcy under Chapter 13. Repayment bankruptcy under Chapter 13 does not involve liquidating, or selling, any of the debtor's assets, which means a Chapter 13 bankruptcy will never result in the loss of your California home. To the contrary, Chapter 7 does involve risk of losing your home.

Exemption Lists

The U.S. Bankruptcy Code provides that each state can decide for its residents what property is or is not exempt from loss in a Chapter 7 bankruptcy. California has created two alternate exemption lists and the debtor has the right to choose whichever exemption list is most advantageous. The first exemption list provides for a homestead exemption of $50,000 for a single debtor or $75,000 for a family. The second exemption list provides for a small homestead exemption of $20,725.

Exemption Calculation

A homestead exemption protects your home from liquidation, but only if your home equity is lower than the exemption amount. Your home equity is the difference between the current fair market value of your home and the outstanding balances of any mortgages on the home. If you use the second exemption list and your home equity is less than $20,725, you will be allowed to keep your home. But if your home equity is greater than $20,725, the bankruptcy trustee working on your case will have the right to sell your home. If a sale occurs, the trustee will give you $20,725 in cash to cover your exemption and will use the balance of the sales proceeds to pay off creditors.

Protect Your Equity

If you decide to file Chapter 13 bankruptcy in California, you don't need to worry about losing your home no matter what your equity is. However, if you will file Chapter 7 bankruptcy and your home equity exceeds the homestead exemption you will claim, you may want to consult a bankruptcy attorney long before you intend to actually file for Chapter 7. A bankruptcy attorney can guide you through the delicate process of refinancing or otherwise reducing your home equity before you file Chapter 7.

References

• "The New Bankruptcy: Will It Work For You?"; Stephen Elias; 2009