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Protecting Your Equity

Every state lets you keep at least some home equity when you go through Chapter 7 bankruptcy. Protection for home equity varies dramatically from state to state; you get $500,000 in Massachusetts, $50,000 in New York, and just $5,000 in South Carolina. In about 20 states, two exemption lists, one state and one federal, are available. You can pick the one that’s most advantageous to you. (Though if you haven’t resided for at least two years in the state where you file for bankruptcy, you must use the exemptions for the state where you resided before the beginning of that two-year period.)

If your equity is under the amount that’s protected, you should be able to keep your house when you go through Chapter 7 bankruptcy.

EXAMPLE: Stuart and Stephanie have built up $25,000 of equity in their house, and they’ve managed to stay current on the mortgage payments. But credit card and medical debts (their young son has been ill) have piled up alarmingly, and they’re considering bankruptcy.

 

They live in Maine, which lets them keep $70,000 of equity under the state’s homestead exemption. If they filed for bankruptcy, the trustee would not take their house and sell it. That’s because after paying off the mortgage, only $25,000 would be left—and that wouldn’t be available to creditors because it’s within Maine’s $70,000 homestead exemption.

If you have a lot of unprotected equity, however, the bankruptcy trustee is going to want to get at it, so that it can go to your creditors.

EXAMPLE: Petra owns a house in New York, which she inherited from her grandfather. The house carries a mortgage of $300,000 but is valued at $500,000, meaning Petra has equity of $200,000. In New York state, you may protect only $50,000 worth of equity in your house. Petra is in a jam. She can’t borrow against her equity because she can’t afford to pay down another loan, but she needs the protection of bankruptcy against several creditors who are threatening to sue her. She’s managed to keep current on her mortgage payments, but she won’t be able to keep that up if her creditors sue her and garnish her wages.

 

If Petra filed for Chapter 7 bankruptcy, the bankruptcy trustee would sell her house, pay off the mortgage, give Petra her $50,000 exemption and use the rest to pay Petra’s creditors. If there were anything left over after that, Petra would get that as well. If this is not the result Petra wants—and it probably isn’t—she should not file for Chapter 7 bankruptcy.

How much home equity can you keep? If you have home equity and you want to find out how much your state protects, or what other property is protected under your state’s exemption laws, go to www.legalconsumer.com. Click on your state and choose “Exemption Laws.”