By: Jonathan Cohen
“Is the trustee going to take my home and sell it to pay off my creditors?”
I get asked this question often by prospective and current clients. The short answer is no. This is why the Federal Bankruptcy Code has exemptions.
Let’s take an example and work through it. First, let’s assume a home has a value of $400,000.00. To accurately value your home, be realistic. What would it sell for if you had to sell it today? Take that amount and reduce it by the cost of sale.
Cost of sale reflects all of the costs to sell a home: realtor’s commissions, attorney’s fees, and title insurance. In a Chapter 7 case, the cost of sale is 10%. In a Chapter 13 case, it is 13%. So multiply the value of your home by either .9 or .87.
Here, we will assume that this is a Chapter 7 case. Applying the cost of sale, $400,000.00 x .9, leaves a value of $360,000.00. Assume that the mortgages on the home total $350,000.00. This leaves equity of $10,000.00 in the home. The “Real Property” (real estate) exemption for one’s primary residence is $21,625.00 for a single bankruptcy filer or $43,250.00 for a married couple filing jointly.
Here, there is no unexempt equity for either a single or married couple filing jointly. You are then eligible for a Chapter 7 filing discharging your unsecured debts (i.e. credit cards, medical debts) with no repayment to your creditors.
If there is equity over the allowable amount under the Real Property exemption, then you would be eligible for a Chapter 13 Bankruptcy. If, say, the unexempt equity in the property was $10,000.00 (after using the above analysis but substituting a 13% cost of sale) then $10,000.00 would be paid back to your creditors over 36-60 months in exchange for retaining the real estate. These payments are administered by the Chapter 13 Trustee’s office.
Similarly, there are an extensive number of exemptions under the bankruptcy code including exemptions for automobiles, household goods and furnishings, jewelry, personal injury lawsuit proceeds, and retirement accounts.
As always, I am available for a free consultation to explain this to you in person. My job is to alleviate your worry and anxiety and get you back on the path to leading a decent life free from unwanted debt.