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Archive for the ‘protecting home equity’ tag

Protecting Excess Home Equity through Chapter 13

July 15th, 2019 at 7:00 am

Chapter 13 can be a highly advantageous way to protect your home equity if that equity is larger than your homestead exemption amount.  

 

The Problem of Too Much Home Equity

Our last two blog posts were about protecting the equity in your home through the homestead exemption. Two weeks ago was about protecting the current equity; last week about protecting future equity. The blog post about protecting current equity assumed that the amount of equity in your home is no more than the amount of your applicable homestead exemption. For example, if your home is worth $300,000, your mortgage is $270,000, that gives you $30,000 of equity. If your homestead exemption is $30,000 or more that equity would be protected in a Chapter 7 bankruptcy case.

But what if you have more equity in your home than the applicable homestead exemption amount? In the above example, what if you had $30,000 in equity but your homestead exemption was only $25,000? Your home could conceivably be sold by the bankruptcy trustee if you filed a Chapter 7 case. Your creditors would receive the proceeds of the sale beyond the homestead exemption amount. Presumably you need relief from your creditors. But clearly don’t want to give up your home and its equity in return for being free of your debts.

What about getting that equity out of the home through refinancing the mortgage? Well, what if you don’t qualify to refinance your home? You may not have enough of an equity cushion. Or your credit may be too damaged. Or maybe you’d qualify for a refinance but it still wouldn’t get you out of debt. That would not be a good option. So what do you do instead to protect your home and that equity?

The Chapter 13 Way to Protect Extra Equity

If your home equity is larger your applicable homestead exemption, then filing a Chapter 13 case can usually protect it.  Chapter 13 “adjustment of debts” protects excessive equity better than Chapter 7. Essentially Chapter 13 gives you time to comfortably pay your general creditors for being able to keep your home.

Why do you have to pay your creditors to be able to keep your home? Remember, if your home equity is larger than your homestead exemption, the alternative is having a Chapter 7 trustee sell the house to get the equity out of it to pay to your creditors. Chapter 13 is often a tremendously better alternative, as we’ll explain here. Also, see Section 1325(a)(4) of the Bankruptcy Code.

Gives You Time to Comfortably Pay

Consider the example above about having $5,000 of equity more that the amount protected by the homestead exemption. Chapter 13 essentially would give you 3 to 5 years to pay that $5,000. This would be done as part of a monthly payment in your Chapter 13 payment plan. $5,000 spread out over 3 years is about $139 per month. Spread out over 5 years is only about $83 per month. Assuming this was part of a monthly payment that reasonably fit into your budget, wouldn’t it be worth paying that to your general creditors if it meant keeping your home and all of its equity?

It’s likely more complicated than this in your personal situation. You may be behind on your mortgage payments or owe income taxes, or countless other normal complications. But at the heart of it Chapter 13 can protect your equity in a flexible way. It’s often the most practical, financially most feasible way.

Chapter 13 is Flexible

To demonstrate Chapter 13’s flexibility, let’s add one of the complications we just mentioned: being behind on your mortgage. Chapter 13 usually allows you to catch up on your mortgage first. So, for example, most of your monthly plan payment could go to there during the first part of your case. Then after that’s caught up, most of the payment could go to cover the excess home equity. The creditors would just have to wait.

Protecting Your Excess Equity “For Free”

Sometimes you don’t have to pay your general creditors anything at all to protect the equity beyond your homestead exemption.  Consider the example we’ve been using with $5,000 of excess equity. Now, using another complication mentioned above, assume you owe $5,000 in recent income taxes. That tax is a nondischargeable” debt, one that is not written off in any kind of bankruptcy case. It’s a “priority” debt, one that you’d have to pay in full during the course of a Chapter 13 case. If you pay all you can afford to pay into your Chapter 13 plan, and it’s just enough to pay your $5,000 priority tax debt, nothing gets paid to your general creditors. You pay the priority tax debt in full before you have to pay a dime to your general creditors. If there is nothing left for the general creditors after paying all that you can afford to pay during your required length of your payment plan, you likely won’t need to pay those debts at all. 

This means that you saved the equity in your home by paying the $5,000 into your plan to pay off the tax debt. That’s a debt you’d have to pay anyway. You’d have to pay it if you didn’t file any kind of bankruptcy case. You’d have to pay it after completing a Chapter 7 case because it does not get discharged. And it also has to be paid in a Chapter 13 case. But in a Chapter 13 case you fulfill your obligation to pay the $5,000 (in our example) to protect your home equity (the amount in excess of the homestead exemption), whether it goes to the pay the tax or goes to pay the general creditors. Under the right facts you save your home and pay nothing to your general creditors.

Conclusion

Chapter 13 can be an extremely favorable way to keep a home with more equity than the homestead exemption amount. At worst, you’d pay the amount of equity in excess of the exemption. But you would do so based on a reasonable budget, with significant flexibility about the timing of payment. At best, you wouldn’t pay anything to your general creditors, when the money instead goes to a debt you must pay anyway, like the recent income tax debt in the example.

These situations depend on the unique circumstances of your finances.  See a highly competent bankruptcy lawyer to get thorough advice about how your circumstances would apply under Chapter 13.

 

Protecting Future Home Equity through Chapter 7

July 8th, 2019 at 7:00 am

Protecting present home equity is a sensible focus when considering bankruptcy. Protecting future potential equity can be even more important. 

 

Our last blog posts discussed how to protect the equity currently in your home through the homestead exemption. We discussed property exemptions in bankruptcy in general, and federal and state homestead exemptions in particular. Overall we showed how your homestead exemption can preserve the equity you presently have through a Chapter 7 case.

We mentioned that you can also protect your future home equity through these same tools, but we didn’t describe how. This is worth more attention.

Future Home Equity

Chapter 7 bankruptcy fixates on the present. It deals with debts you have at the moment your lawyer files the Chapter 7 case at the bankruptcy court. In particular, Chapter 7 usually is not interested in new assets you acquire after the date of filing, For example, the money you earn when you go to work the day after filing is outside bankruptcy jurisdiction. Again, for most purposes bankruptcy looks only at what you own on the date of filing.

This is also true as far as your home is concerned. Chapter 7 fixates on how much equity you have in the home at the moment of filing. That is, we look at what the home is worth then, and how much debt there is against it. (The debt includes all valid security interests against the home: mortgages, property taxes, income tax liens, etc.)

But those factors that determine your home equity—the home’s value, and the amount(s) you owe against it—change. They change all the time. The home’s value goes up and down (but mostly up) with the market. The debt on the security interests change every day with interest and every time you make a payment. Generally after filing bankruptcy and getting your financial house in order, you’d make progress paying down home debts. With the home value usually going up and debt against it going down in the years after filing bankruptcy, most people build equity in their home.  

Future Home Equity Greater than Present Homestead Exemption Amount

There’s a good chance that at some point—if you keep your home long enough—the amount of your home’s equity will exceed the applicable homestead exemption.

Take this example. A home is worth $300,000, the mortgage is $260,000, with a remaining equity being the difference, $40,000. Assume the applicable homestead exemption is $50,000. That covers the $40,000 in equity.

Now let’s say that in 3 years the home value increases to $335,000, and the mortgage is paid down to $250,000. The amount of equity at that point is the difference: $85,000. That’s $35,000 more than the applicable $50,000 homestead exemption (assuming that hasn’t been increased in the meantime).

If this homeowner filed a Chapter 7 bankruptcy now, the $40,000 in present equity is protected by the homestead exemption. But what if the homeowner doesn’t file bankruptcy now but waits 3 years to do so? The home equity will at that point have increased well beyond the amount the homestead exemption would protect.

Future Equity is Even More Important than Protecting Your Home Now

Sure, when you’re considering bankruptcy, your focus is on the present. As far as protecting your home equity, mostly all you want to hear from your bankruptcy lawyer is that the equity is covered now. Is the home equity going to be protected?

But as you think about whether you should file bankruptcy, Chapter 7 or Chapter 13, and when to do so, potential future equity is arguably an even more important consideration.

Most directly, there are simply likely more dollars at stake in future equity vs. present equity. In the above example, the person was protecting $35,000 in home equity when filing bankruptcy now. But by the same bankruptcy filing he or she was protecting $85,000 in future equity. Isn’t protecting that future $85,000 at least as important in protecting the present $35,000 in value?  

Conclusion

When you consider whether to file bankruptcy, you’re thinking about both the present and the future. You want relief and a fresh start now so that you can have a more financially peaceful and prosperous future. When thinking about your home, Chapter 7 allows you to preserve your present modest equity now so that it’ll have the opportunity to build it into much larger future equity.

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