It Depends On What It’s Worth!
Although it is rare these days, we do occasionally meet and discuss a Chapter 7 bankruptcy filing with a Michigan homeowner who actually owns their home free and clear of any mortgage or other lien. Unlike many, in that case, the home or a mortgage or multiple mortgages is not the reason that they are considering bankruptcy: it is simply overwhelming credit card debt, medical bills, or other obligations of an impossible-to-deal-with nature.
The primary question, immediately, with such homeowners is whether a Chapter 7 bankruptcy, which is the sort of bankruptcy ideally suited for someone simply needing to discharge unsecured debt like credit card or medical debt, will actually be too “dangerous” for that person. That is, for the sake of discharging some credit card debt, will they lose their home?
The quick answer is maybe, depending upon the value of the home. And depending on what other property the individual owns.
How Much Equity Can I Protect?
There are two sets of bankruptcy estate “exemptions” that a Michigan bankruptcy attorney can use to protect a home that is a filing debtor’s primary residence: Michigan’s state exemptions and the Federal exemptions.
Michigan’s bankruptcy exemptions will exempt a home with fair-market value up to $30,000 if they are under the age of 65 or up to $45,000 if they are over the age of 65, or disabled. However, Michigan’s bankruptcy exemptions have been challenged and found to be unconstitutional based on a certain fine point by several judges in the state, and, as a result and for other reasons explained below, I rarely use the Michigan bankruptcy exemptions for any of my clients.
The Federal bankruptcy exemptions allow a home with fair-market value up to $21,625 but allow $11,975 of that amount, if not used for the homestead of the filing debtor, to be used as a “wildcard” exemption to protect any other property the debtor may have. This “wildcard” exemption is the only Federal exemption available to exempt and protect cash, bank account balances, claims owed to the debtor by others, corporate ownership interests, comic book collections, guitars, and other miscellaneous property. Michigan’s bankruptcy exemptions do not have a “wildcard” exemption for these sorts of things at all.
In today’s economy, it is rare to find a home with more than $10,000-$20,000 in equity. But it does happen.
Is That Enough to Protect My House?
In that case, the question is the real value of the home. State Equalized Value (SEV) from a homeowner’s latest tax assessment statement (x2), or the values found websites such as Zillow.com are one way to get a general value, but these are frequently wildly overstated or otherwise inaccurate values. Real fair market value is what’s needed to discover whether a home’s equity can be fully exempted or protected, so homeowners considering filing for Chapter 7 bankruptcy should be prepared to potentially have a formal appraisal of the home done in some cases.
If the home is worth more than the bottom-line amounts listed above, the homeowner is faced then with three choices in bankruptcy: allow the Chapter 7 Trustee to seize and liquidate the home (this could actually be desired by the homeowner in some cases), reach a settlement agreement with the Chapter 7 Trustee to essentially “buy” the home back from the bankruptcy estate over which the Trustee has administrative control (this sort of negotiation being occasionally necessary is one of the primary reasons why an experienced Michigan bankruptcy attorney should be used by homeowners desiring a bankruptcy discharge rather than attempting to go at it alone: you can save a few bucks on attorney fees only to lose your valued assets in the process without expert guidance!), or, finally, to file a Chapter 13 bankruptcy instead.
Lose My Home in Chapter 7 Bankruptcy? The Bottom-Line
It is usually this latter option I recommend to clients who have more equity than can be protected in a home that they wish to retain. In a Chapter 13 bankruptcy, no property of the filing debtor is liquidated at all. It is one of the primary reasons why people choose to file Chapter 13 bankruptcy rather than Chapter 7 bankruptcies, even if they are eligible for Chapter 7 based on their income. A Chapter 7 can look attractive, but, as with most things in life, the devil is in the details.
If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.
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