Having equity in a home will not stop you from filing bankruptcy. However, you may be at risk of losing your home if you cannot protect “exempt” it. If you are wondering what happens when you have equity in your home but want to file for bankruptcy, this post is for you.

What will happen to your home equity in case of bankruptcy will depend on various factors such as:

  • the bankruptcy chapter you file under
  • How long have you owned the home?
  • Are there any federal or state exemption schemes that you may be entitled to utilize?

Type of Bankruptcy Chapter You File

There are two bankruptcy chapters, i.e., Chapter 7 and Chapter 13, that you file. Both chapters offer different benefits and allow you to expect a specific amount of your home’s equity. You may wonder what about the non-exempted home equity? Well, the answer to that depends on that bankruptcy chapter you file.

Chapter 7 Bankruptcy

When filing for Chapter 7 bankruptcy, the court will assign a trustee to your case to review all the paperwork to evaluate if you have any non-exempt property. If you have one, you will have to turn it over to be sold and pay off some portion of your debt.

Here is what happens in Chapter 7 Bankruptcy:

  • The Trustee will examine the equity in your home to see if it makes sense to sell your home. Equity is defined as the home’s value minus mortgages, other liens, and costs of sale. 
  • As of 2021 there is a $179,950 exemption that each individual in bankruptcy can use to exempt homes in most parts of New York. For instance, if a New York City home is worth $500,000 and there is a $350,000 mortgage on it, and the home is owned solely by the person who files for bankruptcy, then there is no equity.  The Trustee would be required to pay the debtor $179,950 and the mortgage leaving no money for creditors.
  • If your home sales may not generate enough money to offer a worthwhile return of funds to the creditors, then the trustee may not even bother selling your home.
  • In case if the trustee asks you to turn over your home, you may be able to offer substitute cash or any other exempt property equivalent to the sum of money the trustee will get from selling your home.

Chapter 13 Bankruptcy

If you do not wish to hand over your non-exempt property or home to the trustee to sell, you are better off filing for bankruptcy under Chapter 13. This chapter allows you to keep your home; however, this can comes at a cost.

You will have to pay your entire creditors a non-exempt amount through a scheduled monthly payment plan for the next 3 to 5 years.

This is one of the best ways to file for bankruptcy as it works for all parties involved. Your creditors will still receive as much as they would have through a Chapter 7 bankruptcy, and you will get to keep the home and preserve your equity in the property.

How Much Home Equity Can You Protect?

No matter which chapter of bankruptcy you file, you will still be able to claim some of your property as exempt. This means you would not have to hand it over to a bankruptcy trustee to sell it and pay off all your creditors.

Your state law determines the value and type of property you can have an exemption for.  To get some advice in your area, you can look search online for a bankruptcy lawyer in various areas such as “Brooklyn Bankruptcy lawyer,” “Westchester bankruptcy lawyer,” “Yonkers bankruptcy lawyer,” etc.

Some states may even allow you to choose whether to use a federal exemption scheme or a state exemption scheme. If you are in the state of New York, it is a good idea to speak to an attorney with expertise in New York Chapter 7 Bankruptcy laws and Chapter 13 Bankruptcy laws.

 Most states will allow you to get an exemption for homestead equity, i.e., your primary residence. If you own other real property, you will only be able to obtain equity exemption in other properties. However, it is only possible if a federal or state law has a specific exemption rule for the property type you own.

What If You Are New to a State?

If you have recently relocated to a new state in the last two years, you will not be able to use exemptions offered by the new state. Instead, you will have to apply for the exemptions applicable in the state you were living for 180 days prior to the two years in the new state. This is also known as the 730-day rule.

Did You Purchase Your House in the Last 40 months?

If you are someone who has only bought the home less than 40 months ago before the date of filing for bankruptcy, then you will be subject to a $170,350 exemption limit. This amount cap applies to any bankruptcy cases filed between April 1st, 2019, and March 31st, 2022 (regardless of the state exemption scheme).

The purpose of this limitation is to discourage people from moving to exploit the generous exemption rule offered by some states.

Bottom Line

If you are considering filing for bankruptcy in the state of New York, then we at The Law Office of William M. Waldner can help. Contact our lawyer with expertise in bankruptcy and garnishment in New York today and discuss your specific situation.

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