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What is the interplay between bankruptcy and home equity?

Many people reach the decision to file for bankruptcy only after evaluating all other potential options. This is a prudent approach to such an important issue, but at the outset many people have quite a few concerns. Will I lose everything I own? Will my retirement savings be seized? Will I lose my home?

The good news is that for many Escondido residents who end up filing for bankruptcy protection under Chapter 7 of the Bankruptcy Code, these concerns can often be minimized, particularly the concerns regarding keeping the family home. So, what is the interplay between a bankruptcy filing and home equity?

For the most part, the determination as to whether or not a person will have to sell their home in order to satisfy outstanding debts as part of a bankruptcy filing comes down to the amount of equity the filer has in their home. For those who don't know, home equity is usually calculated by looking at the market value of the home, and then subtracting the amount that is owed on the home. It is fairly straightforward: If you were to sell your home, how much money would you have left after paying off the remaining amount on the mortgage? That is home equity.

For many people who file for Chapter 7 bankruptcy, their home equity is usually either very low, or actually in the negative - their home is "underwater." As a result, Escondido residents who find themselves in this position will probably be allowed to keep their home. That's because bankruptcy filers with little equity - or negative equity - in their homes are exempt under Chapter 7 from having to sell the home.

Source: FindLaw, "Can I Keep My Home After Filing Bankruptcy?," accessed July 26, 2015

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