A Guide Into How a Bankruptcy Trustee Determines the Value of Your Home

If you are falling behind on your debt payments, there is a chance you are being pursued by debt collectors. They barrage you with communication in an effort to get you to pay off your debt, whether or not it is the best move for you. Luckily, there is an 11 word phrase to stop debt collectors, however, that may not be the end of your journey. If you are far enough behind on your payments, it may be time to consider filing for bankruptcy. 

Whether you file Chapter 7 or Chapter 13 bankruptcy, your home will impact your bankruptcy case. When filing bankruptcy under Chapter 7, your state law will determine how much home equity you can exempt through a bankruptcy exemption. If you are wanting to file for Chapter 7 bankruptcy, it’s important to consider the requirements for filing. If you want to see if you qualify, consider taking a chapter 7 means test calculator. It can help you understand your options and whether or not you are eligible for Chapter 7 bankruptcy.

If the non-exempt equity in your home is high, the bankruptcy trustee assigned to handle your case will value your home, sell it, and use the sales cost to pay the outstanding mortgage. The trustee will then give you the exemption amount you are entitled to and use the remaining sales proceeds to repay unsecured creditors. What is exempt and non-exempt equity, and how does a trustee determine the value of your home?

Non-Exempt Equity

Equity refers to the value of the property you get from sale proceeds minus the valid liens on the property. 

Illustration: assuming your home is worth $300,000, and you owe $100,000 on your first mortgage and $50,000 on your second home, your home’s equity will be $150,000. So, if you decide to sell your home, you expect to receive $150,000 less selling expenses and closing property. That is the equity of your home. 

Each state has its bankruptcy exemptions that allow you to protect the equity in your property. An exemption is a protection against the sale of an asset to repay unsecured debts since secured creditors may have a legal lien on the property. For example, a mortgage lender is a secured creditor with lien over the house.

Non-exempt property refers to your property that isn’t protected. Therefore, when filing bankruptcy, you will give up all non-exempt property to your bankruptcy trustee, who can legally put up the property for sale and use the money to repay unsecured creditors after giving you the exempted amount.

How Are Federal Bankruptcy Exemptions Different from State Bankruptcy Exemptions?

Bankruptcy exemptions are laws that seek to protect your property when you file for bankruptcy. They ensure you don’t give up all your assets when filing for bankruptcy. There are two main bankruptcy exemptions- federal exemptions and state exemptions.

There is a list of federal bankruptcy exemptions, but currently, the maximum for a homestead is $25,150 for every debtor. So, if both spouses legally own the property and decide to file for bankruptcy jointly, the maximum exemption will be $50,300. These maximums were set on April 1, 2019, and since they are updated every three years, they are subject to change on April 1, 2022. 

Other than the federal exemptions, the Bankruptcy Code gives each state the power to enact bankruptcy exemptions for people seeking bankruptcy relief in the state. Therefore, state laws vary, with some states allowing their petitioners to choose between state and federal exemptions. 

State exemptions often change. So, you should always check the current limits to use the correct figures in your non-exempt equity calculations.

Does Non-Exempt Equity Affect My Bankruptcy Case?

The Chapter 7 trustee assigned to your case represents unsecured creditors. Their primary role is to ensure that unsecured creditors recover their debt either fully or partially. Therefore, the trustee searches for your property that they can sell and use the proceeds to repay the creditors. 

So, suppose your property has non-exempt equity. In that case, the trustee is legally allowed to sell the property, give you the exempted amount and use the balance to pay the unsecured creditor. However, this is not the case if you file Chapter 13 bankruptcy. 

A Chapter 13 trustee is not allowed to sell the property. However, the non-exempt equity must be rendered to an unsecured creditor. So, your non-exempt equity will be added to your plan payments. Thus the more non-exempt equity you have, the higher your payments. However, you will not be paying more than the debt you owe. 

How a Bankruptcy Trustee Calculates the Equity in Your Home

Although trustees are different, most of them use this formula to determine to equity of your home;

The market value of your home

LESS: mortgage payoffs

LESS: any filed lien (such as tax liens)

LESS: estimated closing costs

LESS: claimed bankruptcy exemptions

Note: Most bankruptcy trustees acknowledge that during a quick sale, the property’s value will be less than the appraised value if it remains on the market until it is bought for the appraised value. Thus, trustees may use a lower value when calculating non-exempt equity instead of the appraised value.

Chapter 7 trustees rarely pursue a home with minimal equity because the cost of liquidating the home could be burdensome. However, it depends on the number of unsecured creditors and how much they might receive after giving you the exempted amount and paying the selling expenses. 

So, if you own property with equity, consult a bankruptcy attorney before filing bankruptcy. Bankruptcy lawyers understand how trustees operate and how they approach the property with equity. 

Hiring a local bankruptcy attorney is best since they better understand the jurisdiction and state laws. They can accurately predict if you will lose your home if you file bankruptcy under Chapter 7 or how your equity will affect your Chapter 13 payment plan. 

What To Do If Your Bill is More than Your Income 

If you’re considering filing for bankruptcy, you’ll also want to consider the cost of filing for bankruptcy. Keep in mind that costs are relative to where you live. So, depending on where you live, you need to be wondering how much does it cost to file bankruptcy in Alabama, or how much does it cost to file bankruptcy in New Mexico, specifically. Make sure you are looking specifically at the cost in your state instead of general costs. Doing so can help you more accurately predict what you are looking at paying. 

Are you earning less than enough to cater for your bills or repay outstanding debts? Your first thought may be to file bankruptcy, which is a good option. However, bankruptcy cases can be complicated, so you should consult a bankruptcy attorney. 

Besides, between Chapter 7 and Chapter 13 bankruptcy, how do you decide which is best for you? Have you considered other debt-relief options? Before filing bankruptcy, there is so much to consider, which could be overwhelming. Call us today to book your free consultation with the best bankruptcy lawyers. Remember, choosing a bankruptcy attorney within your state is better as they understand the state exemptions better.