Evaluate Your Home Before Filing For Bankruptcy
Everyone who files for bankruptcy under any chapter, chapter 7, chapter 13 or chapter 11, needs to know how to protect their home from the reach of the bankruptcy trustee or creditors.
Many people ask, “how do I keep my home when filing for bankruptcy?” It’s an important question, if not the most important. The market for the Phoenix, Arizona area is tumultuous to say the least.
The value of properties in Phoenix and the surrounding metro area has significantly increased over the last few years. The current status as of 2023 has seen the market steady, but many economists are hopeful it will continue to rise while many others see a coming decline.
In either event, knowing how to value assets for Chapter 7 or other types of bankruptcy is important as it may determine the direction of your bankruptcy and how you file it.
In this article, we’d answer the question “Why Do I Need To Evaluate My Home Before I File For Bankruptcy?” and explain what bankruptcy appraisal means.
Bankruptcy Home Appraisal
When facing overwhelming debt and considering bankruptcy, it’s crucial to evaluate all your assets, and your home is likely the most significant one. A bankruptcy home appraisal is a process of determining the fair market value of your property, and it plays a crucial role in the bankruptcy proceedings. Here’s why this appraisal is essential:
Accurate Asset Valuation
An appraisal provides an unbiased and professional assessment of your home’s value. This information is vital for both Chapter 7 and Chapter 13 bankruptcies. Knowing the accurate value of your home ensures transparency in your financial disclosures and helps avoid disputes with creditors.
Homestead Exemption Protection
In many bankruptcy cases, homeowners can protect a portion of their home’s equity through homestead exemptions. The appraisal helps you determine how much equity you have and whether it falls within the exemption limits in your state.
Choosing the Right Bankruptcy Chapter
The type of bankruptcy chapter you choose can significantly impact your home. If your home has substantial equity and you want to keep it, Chapter 13 bankruptcy might be more suitable than Chapter 7. The appraisal assists in making an informed decision based on your property’s value.
Negotiating with Creditors
Knowing the true value of your home can empower you during negotiations with creditors. If the appraisal shows a lower value than what creditors believed, it may lead to more favorable negotiations for repayment plans.
Preventing Undervaluation or Overvaluation
An accurate appraisal helps prevent undervaluation, which could jeopardize your right to protect your home, as well as overvaluation, which may trigger objections from creditors.
Chapter 7 Home Appraisal
In Chapter 7 bankruptcy, also known as “liquidation bankruptcy,” a home appraisal refers to the process of determining the fair market value of a debtor’s residential property. Chapter 7 bankruptcy involves the liquidation of a debtor’s non-exempt assets to repay creditors, providing them with a fresh financial start.
A bankruptcy trustee will be assigned to your case. The trustee’s job is to find assets that are unprotected in bankruptcy that may be sold or liquidated for the purpose of paying any money the trustee can find to your creditors.
To do this, the trustee will be looking at your home to see if there is any equity above your current homestead exemption. In Arizona, the homestead exemption is $400,000 of equity.
Assuming you qualify for the full amount of the exemption, you can protect up to $400,000 of equity in your home. That may seem like a huge number, but what happens if you have more than $400,000 of equity? The first place many trustees’ look to is Zillow.com for a quick evaluation of your home.
If Zillow looks promising, the trustee will hire a real estate agent to conduct a more formal evaluation. The realtor will run a Comparative Market Analysis (“CMA”) to see where it stands. Remember that in bankruptcy, the true market value of a property is what it will sell for at the time.
Too much equity in home for chapter 7
If you have too much equity in your home, it could create challenges when filing for Chapter 7 bankruptcy.
What that means is if the trustee believes you have any equity above the exemption, he or she will put your house up for sale. If the trustee’s realtor can make more money than what you have for an exemption, you will be forced to move.
You likely will get the $400,000 exemption at the time of closing, but it may prove to be difficult to buy a new home shortly after filing chapter 7 bankruptcy. Before filing for bankruptcy, have your own CMA done so you can make sure your home is safe from the trustee and your creditors.
Evaluating Your Home in a Chapter 13 Bankruptcy
In chapter 13 bankruptcy, you keep all the assets you own, so there’s not so much of a worry that a bankruptcy trustee is going to step in and sell your home out from underneath you. However, you still need to know what the value of your home is before you file.
Why, you may be asking? Because even in chapter 13 bankruptcy, if your home’s value shows it is above the exemption, you have to come up with the equity above the exemption to be paid back in your chapter 13 plan.
Let’s talk about that. In chapter 13 bankruptcy, you are offering to pay back a portion of your debt through a chapter 13 plan. Chapter 13 plans are typically 36 to 60 months depending on your income and how much you can afford to pay.
However, if you plan on filing bankruptcy and your home has equity of $10,000 above the homestead exemption, then you can plan on paying at least $10,000 of your debt in your plan. It may be more, if you can afford to pay more, but it must be at least that amount. Let’s look at this hypothetical:
Chapter 13 Hypothetical | ||
| Your Home’s Value on Zillow.com | $600,000 | |
| Minus Your Current Mortgage Balance | ($190,000) | |
| Minus Your Homestead Exemption | ($400,000) | |
| Leaves You with This Much Equity Above Your Homestead Exemption | $10,000 | |
In this example, you would be required to at least pay $10,000 of your debt in your chapter 13 plan. If you were thinking of filing chapter 7, you can bet the chapter 7 trustee is going to be looking very closely at your home to decide whether to put it on the market.
However, you would be able to keep the home in chapter 13, but the $10,000 of unexempt equity would have to be factored into the total amount of debt you are agreeing to pay into the chapter 13 plan.
$10,000 does not seem like much when you divide it over 60 months ($10,000 / 60 months = $166.66 per month) but when you factor in everything else, it all adds up.
However, if you had a professional opinion from a realtor showing that the Zillow.com value was overinflated or wrong, and your home really is worth much less than the $600,000 price tag from Zillow and you could prove that in a written CMA or Broker’s Price Opinion (“BPO”), you might save yourself $166.66 per month on your chapter 13 plan payment.
Evaluating Your Home in Chapter 11 Bankruptcy
Chapter 11 bankruptcy works very similarly to chapter 13 if the home is your primary residence. But what if you have investment properties? Many people are real estate investors and landlords.
Filing chapter 11 bankruptcy could help you with investment properties that are not cash flowing and turn them into cash flowing properties. Take this example: Chapter 11 bankruptcy filer has an investment property with a renter living in it.
The mortgage is $2,500 including debt service, maintenance and upkeep, HOA, and other factors. The renter is only paying $2,200 per month leaving a negative cash flow balance of ($300.00) per month.
Raising the rent in this market will make it difficult to find another stable renter. Maybe you have two or three properties that are all in the same situation. Filing chapter 11 bankruptcy can help you renegotiate with those mortgage lenders, get a better rate, and possibly bring down the principal balance, if the property has gone under water.
These are all great advantages to filing a chapter 11 bankruptcy for real estate investors. This process works whether the investor is into residential or commercial properties.
What if My Home is Underwater?
Underwater means the home is worth less than what you owe on the mortgage. In these cases, you can short sale the property. Short selling prevents foreclosure, leaves a better mark on your credit than a foreclosure will, allows you to purchase real estate again in a shorter time frame than if you file bankruptcy or allow the property to foreclose either in bankruptcy or outside of bankruptcy.
Sometimes lenders will even pay you to short sale your home and move out of the property if you leave it in good condition. You can still file for bankruptcy after a short sale, if you have other types of debt.
Always remember to evaluate all the liens on the property. Besides your mortgage, do you have an HOA lien, IRS lien, solar panels, swimming pool liens or contractor liens on your property? All of these types of liens whether they are consensual or non-consensual eat up the equity in your home. Also remember to factor in closing costs and realtor fees when getting to the true value of your property.
These additional liens and factors can be added into the example I have shown above for chapter 13 cases to get to the true value of the property. If the value is less than what you owe, consider a short sale. If it is more than what you owe and above the homestead exemption, consider filing chapter 13 bankruptcy. If it’s somewhere in between, you are probable safe to file a chapter 7 bankruptcy.
In any event, call us for a free consultation. We will take a look at your property along with you to determine the best course of action for you and your bankruptcy. Maybe you don’t even need to file, but talk to a professional at Gaudiosilaw to find out what the best option for you is.
Frequently asked questions
How much equity can i have in my home and
still file chapter 7?The amount of equity you can have in your home and still file for Chapter 7 bankruptcy depends on your state’s homestead exemption laws. Homestead exemption limits vary from state to state. In Arizona, the homestead exemption is $400,000 of equity.
How much debt is worth filing bankruptcy?
The decision to file for bankruptcy is not solely based on the amount of debt you have but rather on your overall financial situation and ability to repay the debts. There is no specific threshold of debt that qualifies someone for bankruptcy. If you are facing overwhelming debt, have explored other debt relief options, and are unable to meet your financial obligations, bankruptcy might be a viable solution to consider.
What do you lose if you declare bankruptcy?
When you declare bankruptcy, your non-exempt assets may be at risk of being liquidated to repay creditors. The specific assets you might lose depend on the type of bankruptcy you file (Chapter 7 or Chapter 13) and your state’s exemption laws. However, it’s important to note that many states have exemptions that allow you to keep essential assets, such as your primary residence, vehicle, and necessary personal belongings.
If you declare bankruptcy: what happens to your debt?
When you declare bankruptcy, an automatic stay goes into effect, which prohibits creditors from pursuing debt collection activities. Your debts will be classified into different categories, such as priority debts (e.g., taxes, child support) and dischargeable debts (e.g., credit card debt, medical bills). In a Chapter 7 bankruptcy, dischargeable debts are typically forgiven, while Chapter 13 involves creating a repayment plan to pay off a portion of your debts over time.
What can you not do after filing bankruptcy?
After filing bankruptcy, there are certain restrictions and obligations you must adhere to, such as:
a. Obtaining credit without disclosing your bankruptcy status.
b. Incurring new debts without court approval during Chapter 13 bankruptcy.
c. Filing for bankruptcy again for a certain period (if you have previously filed).
d. Disposing of valuable assets to defraud creditors or hide them from the bankruptcy process.
e. Violating court orders related to your bankruptcy case.
