Will I Lose My Home If I File Chapter 7?

When evaluating the probability that an asset will be liquidated in a Chapter 7, a full review of a debtor's assets is necessary. This is especially true when looking at a debtor's home. 

Federal Homestead Exemption

Under the federal exemptions, a debtor may exempt equity in a home in the amount of $22,975 by using the 11 USC 522(d)(1) "homestead exemption." When it is a joint case (husband and wife filing together), the homestead exemption may be used by both debtors, which would allow for an exemption of $45,950.00.

A debtor's ability to use the homestead exemption is reduced when other assets require exemption under the 11 USC 522(d)(5) "wild card" exemption.  If the wild card exemption is needed to protect assets of a debtor and the equity in those assets exceed $1,225.00, the debtor will need to borrow from the homestead exemption (up to $11,500.00 can be borrowed by each debtor). The wild card exemption is typically used for bank account funds, anticipated tax refunds, stocks or investments outside of an qualified retirement plan, or for assets that have value that exceeds its applicable statutory exemption.

Michigan Homestead Exemption

A debtor is not required to use the federal exemptions.  A debtor may elect to use the Michigan exemptions, which provide for a more generous homestead exemption. However, most debtors do not elect to use the Michigan exemptions because there is no equivalent to the federal wild card exemption. A consultation with an experienced bankruptcy attorney would be able to give you a better sense of what it means to elect state exemptions and if it is right for you.

Trustee Liquidation Analysis

The Trustee, when determining whether he/she will administer or attempt to liquidate an asset, will first try to determine what equity exists (market value less any liens).  Once the equity is determined or estimated, the Trustee will then look at the exemptions taken and see to what extent any of the equity is unprotected. A Trustee will not liquidate a home unless he/she thinks that they can sell it for enough to pay off all the valid liens, pay off the debtor for any valid exemptions, pay all necessary costs associated with a sale, and also have some type of surplus after the liens, exemptions and sale costs are satisfied.

Another important thing to keep in mind is that unprotected equity does not automatically mean that the asset will be liquidated.  A Chapter 7 Trustee is often willing to negotiate a settlement with a debtor to avoid liquidation. This type of settlement generally means paying the Trustee funds equal to the unexempt equity or a portion of the unexempt equity. This can be accomplished by paying a lump sum or by installment payments.

**A note of caution: when filing a Chapter 7, the Trustee will be examining the recorded deed and recorded mortgage(s) to see if there are any defects that would allow them to avoid the lien. Avoiding a lien is a fast way to create a large amount of equity and cause a debtor to lose their home.  This is one, among many, reasons that it is so important to hire an experienced and thorough bankruptcy attorney.

The Bottom Line

Sitting down with an experienced bankruptcy attorney to discuss your assets in detail should provide you with a better sense of whether liquidation is likely for you. An attorney will also be able to discuss your alternatives for resolving your debt while avoiding loss of assets, such as Chapter 13 and debt settlement.

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