Home Equity and Chapter 7: Keeping Your Home If in Debt

Photo by Binyamin Mellish

If you want to file for Chapter 7 in San Diego, you need a capable attorney, someone who’ll help you keep your home equity, and someone from the Bankruptcy Professionals.

If you’re filing for Chapter 7 bankruptcy, the chances are that you’ve already exhausted all your options. It can be overwhelming. This is the case for most Americans, who don’t really have the knowledge to handle such a life-changing decision as filing for bankruptcy. You don’t even know how much equity (which is the value of an asset exceeding any outstanding loans against it) you’ll be left with and whether or not you’re even eligible for this form of debt relief.

When you’re filing for Chapter 7, the amount of equity you have is a critical factor in determining whether the individual has the opportunity to keep some of their assets as opposed to selling them all off to pay off creditors.

For Chapter 7 bankruptcy, there is a means test that an individual must first pass. This test considers the individual’s income, expenses, and family size. If your income is below the mediate state income, passing the means test is automatic, and you can already file for Chapter 7. Otherwise, the second part of the test begins, which is to determine if the individual has enough disposable income that they can pay off their debt over a strict period of time. Assuming an individual passes the means test, the next step is determining how much equity they have in their assets. 

When the equity exceeds what is allowable, the trustee is compelled by federal law to sell the home and pay the debtor the exemption amount from the proceeds of the sale. It is then the burden of the debtor to find a new home to purchase using those funds within six months. If it cannot be done, the trustee can take back the funds and use them to pay the creditors.

State or federal exemptions are available for most individuals to take advantage of, so selected assets can be protected in bankruptcy. At most, considering federal exemptions, an individual can exempt up to $25,000 in equity for their primary residence and between $4,000 to $13,000 in other assets. If you are a married couple jointly filing for bankruptcy, you can potentially double your exemption amount. 

Home Equity and Chapter 7

While there are nuances in bankruptcy law from state to state, there’s some wonderful news for those people considering filing for Chapter 7 in San Diego and other counties in California. In 2020, the state legislature raised the homestead exemption to shield home equity up to a maximum of $600,000 from a minimum of $300,000.

This was made in acknowledgment of the need for existing exemption amounts regarding home values in California (which are some of the highest in the country). 

The new homestead exemption went into effect in 2021 and was dependent on the median sales price of the county where the debtor lived. Inflation was also indexed in the exemption.

Of course, while this is a positive development, people who are considering bankruptcy should still search for and consult with experienced California-based bankruptcy professionals. Doing so will present you with a wider range of options on how to best protect your home and other assets.

The new homestead exemptions do not undermine existing exceptions already provided by California law, such as:

• The portion of home value is secured by mortgages and home equity lines of credit (HELOCs).
• The home value is subject to mechanics’ liens, alimony, and child support judgments.
• State or federal tax judgments or liens from government agencies.

If in Debt

Again, it’s extremely important to note that bankruptcy exemptions vary by state, and some states do not allow federal exemptions, nor do they have homestead exemption laws as in California. Additionally, there are certain types of assets that cannot be used to pay off creditors.

While the information above can be beneficial to Californians, determining how much equity an individual can have and still file for Chapter 7 bankruptcy can be complex and varies by state, so always consult with a bankruptcy attorney from your state. It’s essential to consult with a bankruptcy attorney to understand your state’s specific rules and exemptions and determine the best course of action for your situation.