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Archive for the ‘Homestead Exemption’ Category

Protect Equity in Your Home Better with Chapter 13

August 1st, 2016 at 7:00 am

If your home is exposed to your creditors and to the Chapter 7 trustee because it has too much equity, Chapter 13 can protect that equity.  

 

In our July 1 blog post we gave a list of 10 ways that a Chapter 13 “adjustment of debts” case can help you keep your home. Today we’re on the 10th one on that list. This one’s about saving your home and its equity when that equity is larger than the allowed homestead exemption.

We took a detour in our very last blog post by showing how sometimes filing the simpler Chapter 7 case can still let you keep your home in this situation. But the circumstances that will work are quite rare. So it important to understand how to protect otherwise unprotected equity through Chapter 13.

Here’s how we introduced this earlier as it pertains to Chapter 13.

10.  Protect Equity in Your Home NOT Covered by the Homestead Exemption

Having too much equity in your home is a problem if you owe a lot to creditors.  “Too much equity” means equity more than the amount the homestead exemption protects. Creditors can sue and get judgments against you, resulting in judgment liens attached to that home equity.

If you file a Chapter 7 “straight bankruptcy” case you run the risk of the bankruptcy trustee taking and selling your home to pay the unprotected portion of the proceeds to your creditors.

Under a Chapter 13 “adjustment of debts,” in contrast, you can keep and protect the home and its equity. You pay a certain amount of those debts gradually over the course of the up-to-five-year Chapter 13 case.

Here’s how this works in practice.

The Example

Assume the following facts:

  • You own a home that is worth $275,000.
  • Your mortgage loan on that home is $195,000, so you have equity of $80,000.
  • The homestead exemption available to you is $50,000. This means that you can protect that much of your home equity. (The homestead exemption amount varies greatly from state to state. But let’s assume it’s $50,000 in this example.)
  • You owe $15,000 in income taxes for last year and the year before.
  • You owe $75,000 in credit cards and personal loans, plus $25,000 in medical bills. So you have a total of $100,000 in debts other than the home mortgage.
  • During the last couple of years your income has decreased and your medical and other expenses have increased. So for the last year or so you haven’t been able to pay the minimum amounts on many of your debts as they came due. One collection company has just sued you for $10,000, and others are threatening to do so very soon.

Without Bankruptcy

Summarizing our last blog post, unless you act quickly the collection company would likely get a $10,000 judgment against you. That would likely quickly turn into a $10,000 judgment lien against your home. That creditor may be able to foreclose on that lien, forcing you to pay save your home. At best you’d have to pay off the $10,000 (plus interest) whenever you refinance or sell your home.

Some of your other creditors would very likely also sue and get their own judgment liens against your home.

Chapter 13

You and your bankruptcy lawyer would put together a Chapter 13 payment plan. That plan would be based on the principle that Chapter 13 allows you to keep your home even if its equity is not fully protected by the homestead exemption, as long as you follow certain rules. See Section 1325(a)(4) of the Bankruptcy Code.

Essentially, you must treat creditors in a Chapter 13 case at least as well as they would have been treated in a Chapter 7 case. This applies particularly to the $10,000 tax debt and to the $100,000 in other debts.

So here’s what you would provide for in your Chapter 13 payment plan:

  • Over the course of your plan you would pay off the $15,000 income tax debt. It’s not old enough to “discharge”—legally write off—under either Chapter 7 or 13. But you would not have to pay any ongoing interest or penalties under Chapter 13 (assuming you finished it successfully). And your payments would be flexible, based on what you could afford to pay.
  • You’d pay only as much of the remaining $100,000 as that would have been paid in a Chapter 7 case. Here how that’s calculated, roughly:
    • Determine, hypothetically, how much net sale proceeds would come from your home if a Chapter 7 trustee would sell it. The $275,000 sale price would be reduced by about 6%, or $16,500, for the realtor’s commission. Another $3,500 or so would be spent on title insurance, escrow fees, and any other closing costs. (This assumes no need for any repairs or other sale preparation costs.) The $275,000 sale price minus the $16,500 and $3,500 means a net sale price of $255,000.
    • Subtract the mortgage amount of $185,000 from this $255,000 net sale price results in sale proceeds of $70,000 in this hypothetical sale.
    • Subtracting the $50,000 homestead exemption from this $70,000 leaves $20,000 that you must pay to your unsecured creditors in your Chapter 13 plan.
    • $15,000 of that would go to the income taxes.
    • That leaves only $5,000 ($20,000 minus $15,000) that you need to pay to the remaining $100,000 of debt. In other words, you would have to pay 5% of those debts.
    • Your monthly plan payment would be around $400 per month, for about 60 months. Much of that would go to pay off the taxes, which you’d have to pay after a Chapter 7 case anyway.
    • At the end of your case you would have kept your home in spite of it having $30,000 in equity beyond the $50,000 homestead exemption. The unpaid $95,000 of debts would be discharged.

This is quite a good result. Throughout the Chapter 13 case you and your home would have been protected from the tax collector, the suing collection company, and all your other creditors. Then as of the end of the case you’d have paid off the income taxes, and would be (other than the mortgage) completely debt free.

 

Protect Equity in Your Home Not Covered by the Homestead Exemption

July 29th, 2016 at 7:00 am

If your home is at risk because you have more equity than the amount of the homestead exemption, Chapter 7 might still save your home.  

 

In our July 1 blog post we gave a list of 10 ways that a Chapter 13 “adjustment of debts” case can help you keep your home. Next time we’ll finish this off with the last of those 10 ways. But today we take a detour. We show how filing a Chapter 13 case, lasting 3 to 5 years, might not be necessary to save your home and its equity even if the amount of that equity is larger than what is protected by your homestead exemption. Chapter 7 may be enough.

Here’s how we introduced the Chapter 7 part of this earlier.

10.  Protect Equity in Your Home NOT Covered by the Homestead Exemption

Having too much equity in your home is a problem if you owe a lot to creditors.  “Too much equity” means equity more than the amount the homestead exemption protects. Creditors can sue and get judgments against you, resulting in judgment liens attached to that home equity.

If you file a Chapter 7 “straight bankruptcy” case you run the risk of the bankruptcy trustee taking and selling the home to pay the unprotected portion of the proceeds to your creditors. But you may still be able to keep your home.

First, you might be able to claim exemptions in addition to the homestead exemption. Second, you may be able to convince the trustee to accept a deal to let you keep the home.

Here’s how this works in practice.

The Example

Assume the following facts:

  • You own a home that is worth $250,000.
  • Your mortgage loan on that home is $180,000, so you have equity of $70,000.
  • The homestead exemption available to you is $50,000. This means that you can protect that much of your home equity. (The homestead exemption amount varies greatly from state to state. But assume it is this amount for this example.)
  • You owe $75,000 in credit cards and personal loans, plus $20,000 in medical bills, totaling $95,000.
  • During the last couple of years your income has decreased and your medical and other expenses have increased. So for the last year or so you haven’t been able to pay the minimum amounts on many of your debts as they came due. One collection company has just sued you for $7,500, and others are threatening to do so very soon.

Without Bankruptcy

Unless you have some defense to the $7,500 lawsuit, the collection company will likely get a judgment against you within a few weeks. In most states that would quickly turn into a judgment lien against your home.

That creditor may be able to foreclose on the judgment lien, forcing you to pay to not lose your home. The judgment lien encumbers your title, reducing the equity you have in the home. The underlying judgment debt continues earning interest. At best it would have to be paid off whenever you refinance or sell your home.

Your other creditors would also be motivated to sue you. That’s because even after the $7,500 judgment lien, you still have more home equity that could be attached. You and your home are sliding downhill fast.

Chapter 7

Assuming you want to keep you home and the equity you have in it, Chapter 7 provides some help. Under the right circumstances that help may be enough.

If you and your bankruptcy lawyer file it fast enough, the collection company would not get a judgment. So, no judgment lien on your home. These are good things.

And most likely that $7,500 debt would be legally written off, and usually only 3-4 months after the bankruptcy filing. Furthermore, most likely all of the $95,000 in credit card, medical, and other debts would be written off. Another good thing.

So what’s the problem? The problem is that Chapter 7 is a “liquidation.”

In most Chapter 7 cases nothing the debtor owns gets “liquidated”—taken, sold, and the proceeds paid to creditors. Nothing is taken because in most Chapter 7 cases everything that the debtor owns is “exempt.” That means it’s protected both from your creditors and from the bankruptcy trustee, who works on behalf of the creditors.

But under our facts your home is not fully exempt. The homestead exemption protects only $50,000 of the $70,000 of equity. The Chapter 7 trustee could take and sell the home, pay you your $50,000 homestead exemption, and divide the remaining proceeds of the sale among your creditors. How could you avoid this, keep your home, and write off all your debts? How could you do this without being in a Chapter 13 case for 3 to 5 years?

1) Possibly Apply Other Exemptions

In some states and under some circumstances, you may have other exemptions that you could apply to your home on top of the homestead exemption. Some states provide a relatively large floating exemption that you can add to the homestead exemptions. That may eat up enough of the remaining equity that the trustee is persuaded it’s not worth taking and selling the home.

2) Negotiate with the Chapter 7 Trustee

The trustee is not particularly interested in taking your house. He or she just wants to pay your creditors what the law provides. Under the right circumstances, deals can be struck with the trustee.

In our example, let’s assume that the trustee would agree that the home’s fair selling price would be $250,000. But after paying the mortgage lender $180,000 and $50,000 to you, the trustee wouldn’t actually have $20,000 to distribute to your creditors. There would be selling costs that would cut into that. The realtor’s commission at about 6% is $15,000. Other selling and closing costs would likely eat up all or most of the remaining $5,000.

At this point the trustee may simply agree that selling the home “would not result in a meaningful distribution to the creditors.” That is, there’s a good chance that after much effort there would be little or nothing for the creditors.

Or the trustee may push to get something out of you in return for not selling the home. The trustee may argue, and even get a realtor’s estimate, that the home could sell for $255,000 or $260,000. So the trustee may agree to let you keep the home if you agreed to pay $5,000 or $10,000. You would likely get a year or so to pay it. If you could afford the monthly payments, or had a source for that kind of money, that may be better than a much longer lasting Chapter 13 case.

 

For the sake of comparison, and in case the Chapter 7 option would simply not work, see our next blog post for how a Chapter 13 could solve this problem better.

 

The Homestead Exemption Cap

March 4th, 2016 at 8:00 am

Bankruptcy law sets a maximum dollar amount of protection for your recently-bought home, but this really applies only to certain states.

 

Our last blog post a couple days ago was about protecting retirement funds in bankruptcy. Today’s is about protecting your home, specifically if you bought your home within the last few years.  

Property Exemption Laws

When you file a bankruptcy case, your assets are protected through a set of legal exemptions–a list of categories of assets usually with maximum dollar limits, which you can keep out of the reach of your creditors.

Each state has adopted a set of property exemptions. Federal bankruptcy law also contains its own set of exemptions. When filing bankruptcy in ANY state you may use the state exemptions, plus in some states you also have the option of using the federal set of exemptions instead. This blog post applies only if you are using your state’s exemptions, and in particular applies to your state’s homestead exemption.

The Homestead Exemption

Almost every state has a homestead exemption, protecting their residents’ homes and/or home equity. The homestead exemptions vary widely state to state in how much home value or equity they protect.

At the low end, the Kentucky and Tennessee homestead exemptions protect only $5,000 in value or equity for an individual homeowner.

At the opposite end, the Montana exemption is $250,000, Minnesota’s is $390,000, Rhode Island’s and Massachusetts’s are $500,000, and Nevada’s is $550,000.

Also, the following states have homestead exemptions with no dollar limit (although some have acreage or other limitations): Texas, Oklahoma, Arkansas (if married or head of household), Kansas, Iowa, South Dakota, and Florida.

The Federal Cap on the State Homestead Exemption

As we said at the beginning, under certain circumstances federal bankruptcy law caps the dollar amount of state homestead exemption if you bought the home recently.

The purpose of this cap is to prevent people from moving from a small homestead exemption state and buying a home in a state with a very large or unlimited state homestead exemption in order to shield their assets from their creditors. It also may prevent some long-time residents of these same large exemption states from converting other assets into expensive homes, again shielding those assets from their creditors leading up to filing bankruptcy.

This federal cap on homestead exemptions is $155,675 (increasing to $160,375 on April 1, 2016).

Applicable to High and Unlimited Homestead Exemption States

The relatively large dollar amount of this cap makes it irrelevant to the residents of many states.

This cap will only affect you if your state’s homestead exemption is larger than this cap. That’s true only for the 12 states mentioned above which have either large homestead exemptions (Montana, Minnesota, Rhode Island, Massachusetts and Nevada) or unlimited homestead exemptions (Texas, Oklahoma, Arkansas, Kansas, Iowa, South Dakota, and Florida).

Only Applicable to Relatively Recent Home Purchases

This homestead exemption cap doesn’t kick in unless you bought the home at issue within the 3-years-and-4-months period before filing bankruptcy (within 1,215 days before, to be precise).

And even if you did, the cap doesn’t apply if the equity in the home you bought came from the sale proceeds of another “principal residence” within the same state, which had been purchased before that 3-years-and-4-month period.

The point of these conditions is to cap the large homestead exemptions only for relatively short term residents, or those sinking other money into expensive homes. It’s not designed to prevent those who bought their home more than 1,215 days earlier from using the full state homestead exemption. And it’s not designed for those who bought within that time period but did so by using equity from a prior home bought in that same state before that time period.

 

Chapter 7 and Chapter 13–Too Much Equity in Your Home

October 26th, 2015 at 7:00 am

Most homeowners contemplating bankruptcy have their home equity protected by their homestead exemption. If not, consider Chapter 13.

 

The Homestead Exemption

Throughout the U.S. people filing bankruptcy have the equity in their homes protected by homestead exemptions.

A property exemption in general is the extent to which the law protects something you own, or protects the equity in something you own, from your creditors. Equity is the value of something beyond what you owe on it. If you own a home worth $200,000 and you owe $180,000 on a mortgage, and have no other debts which are liens on your home’s title, then you have equity of $20,000 in the home. As long as the homestead exemption applicable to you is $20,000 or more, you can file bankruptcy and your creditors will have no right to your home or your equity in that home.

Different Homestead Exemptions

Each state has a set of property exemptions, including a homestead exemption. There is also a set of federal exemptions. Whether you can use the federal exemptions or instead are required to use your state’s exemptions depends on the laws of your state.

That’s true even though bankruptcy is a federal procedure governed by federal laws. Because of a Congressional compromise each state can choose to either require its residents to use its own set of exemptions or else be allowed to use either the state exemptions or the federal ones.

The majority of states—currently 31 of them—require you to use their exemptions. The remaining 19 plus the District of Columbia allow you to choose between the state and federal exemptions, including the homestead exemption. Those 19 states in alphabetical order are Alaska, Arkansas, Connecticut, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin.

The amount of equity that different state laws protect can vary widely. They can also change significantly. For example, in Alabama—one of the states which require bankruptcy filers to use its state exemptions—up until June of this year the homestead exemption had been only $5,000 ($10,000 for a married couple) and had not changed for more than 30 years. It was tripled to $15,000 ($30,000 for a married couple), with future increases tied to inflation. In contrast, right next door in Florida—which also requires bankruptcy filers to use its exemptions—the homestead exemption dollar amount is unlimited. It’s only restricted by acreage—to a half-acre in urban areas and 160 acres otherwise.

The federal homestead exemption is currently $22,975.

So to use the example above of the $200,000 with $20,000 in equity, that equity would be protected in Florida or in any state where the federal exemptions can be used, but would not be fully protected in Alabama.

What Happens in Chapter 7 If There’s Too Much Equity

Simply put, if you owned a home with more equity than you were allowed and you filed a Chapter 7 “straight bankruptcy” case, the Chapter 7 trustee could take that home, sell it to pay creditors, and give you the homestead exemption amount (and possibly any left over after paying the creditors in full).

There may be ways to avoid this from happening For example, if there was really less net equity in the property than the exempt amount because what it would cost for the trustee to sell it, the trustee may not be able to take the property. Or you may be able to pay the trustee to avoid the home being sold. But under Chapter 7 a home with more equity than the homestead exemption allows is at significant risk.

What Happens in Chapter 13 If There’s Too Much Equity

Under a Chapter 13 “adjustment of debts” case if you own a home with more equity than the homestead exemption law allows you can protect it by paying to the creditors over the course of a three to five year payment plan at least as much as they would have received under a Chapter 7 case if the home were taken and sold by the trustee. That may require you to pay more to the creditors than you would have had to otherwise. But sometimes it just requires you to pay as much as you can afford to during the time period required. And sometimes it only requires you to pay creditors you would have had to pay anyway, such as income taxes and child or spousal support payments. Overall, Chapter 13 protects otherwise unprotected equity in your home usually better than Chapter 7 can.

 

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