When an individual files for a Chapter 7 bankruptcy, they are essentially petitioning the court to have their debts discharged. However, one part that is sometimes left out is the fact that this type of filing often means that any liquefiable assets must be dissolved and applied to your balances before the remaining amount is discharged, including the equity in your home. If you plan to file for Chapter 7 bankruptcy and you have equity in your home, there are some factors you should keep in mind.
Amount of Equity
Although from a technical standpoint any equity is accessible for payment to your creditors, it does not mean that the court always chooses to exercise this right. Generally, one of the first things the trustee appointed by the court will do is to determine exactly how much equity you have.
If they determine that the equity can pay off a considerable amount of the debt you owe, they are more likely to require you to dissolve this asset. However, if the equity is very small or dissolving the assets would put you in a predicament where you would be unable to find someplace else to live, they may leave it intact.
Community Property States
One factor that might determine how the court might choose to approach the equity in a property is the individuals' marriage status, if they are in a community property state. In community property states, simply by legal marriage, each spouse is entitled to 100% of whatever assets they own, including their home.
For this reason, even if the wife is not filing for bankruptcy and her name is on the property, if the husband files and the home has $50,000 worth of equity, the court can dissolve the property and pay the entire balance towards the debt.
Some states have homestead exemptions that essentially allow the homeowner to safeguard a certain amount of equity in their home, such as $10,000. In terms of bankruptcy, the way the exemption works is that the court can only force you to dissolve the property if the amount of equity in your home exceeds the protected amount.
For example, in a state where the protection threshold is $20,000, if the homeowner filing for bankruptcy has $17,000 in equity, it would be protected according to the state laws.
How the court handles equity in a home can vary. Therefore, having an attorney who can break down the process and guide you through it is especially helpful. Contact an attorney for assistance.