I have a recurring nightmare. No, it isn’t the one where I’m in the ninth grade, and I show up completely unprepared for a math test and end up completely bombing. It’s the one where one of my clients loses their home in bankruptcy. If that ever happens, I’m hanging up my spurs and joining the circus.
So, I’m as concerned as you are about you keeping your home if you file bankruptcy.
Let me say this: you should never be surprised by any issues related to your home after your case has been filed. Any potential problems should be identified by your lawyer before your case is filed, if not before you even retain a lawyer to prepare your bankruptcy petition.
Do I Want To Keep My Home Or Let It Go?
Before I give any advice about keeping a home, I need three pieces of information. First, I want to clarify that my client actually wants to keep the home. If she doesn’t care what happens to the house, that can make planning for her bankruptcy much easier. There are a variety of reasons why someone might not want to keep the house. It might need extensive repairs or updates they can’t afford. I once had a client discover – after she bought the house and had it inspected – that her kitchen floor tiles were made out of asbestos. The price of remediation was beyond anything she could afford and she couldn’t sell it. The only way to get out from under the mortgage was to file bankruptcy.
Second, I need to know how much my client owes on any mortgages or home equity lines of credit (HELOC) or if there are any liens on the property for things like solar panels. I also need to know if she’s current on payments for those loans.
Third, I need to know the fair market value for the home. This is where things get challenging. Potential clients always get defensive when I ask them this question. They tell me it doesn’t matter since they aren’t including the house in the bankruptcy. This is where I have to talk them off the ledge. “Unfortunately,” I say, “you have to include all of your debts and assets in bankruptcy. Including your home.” Once their adrenaline stops pumping, we can go back to talking about the home’s value.
There are a few sources we can use to determine a home’s value. Keep in mind that the only sure way to determine a home’s value is by putting it up for sale and waiting to see what someone will pay for it. Of course, we don’t want to do that, so we are going to look at some other ways. Some people like to use the tax assessment. I don’t like to use it. I’m looking for today’s fair market value. The tax assessment is based on a value that could at best be several months old, and at worst a year old. There are online sources, like Zillow or Redfin, but their algorithms aren’t perfect. Their values can vary greatly and might be relying on sales of homes that don’t resemble anything near what my client’s looks like. You can have your home appraised, but I don’t love this method either. It can be expensive, and my clients aren’t typically flush with cash for such expenses.
My preferred method is having a realtor visit the home and preparing a comparative market analysis. By putting eyes on the property, the realtor can prepare an apples to apples market analysis and give us good idea of what the fair market value is right now. If possible, I’d like to work with a realtor who has experience with people who are filing bankruptcy.
Now that I know how much debt the home has and how much it’s worth, I can calculate how much equity it has. Equity is the value of the home minus any liens (loans). We’ll get to why that matters shortly.
Once I have those three pieces of information, we can talk about the best way to protect the home when my client files bankruptcy.
Is Chapter 7 Or Chapter 13 Bankruptcy Better If I Own A Home?
Individual consumer filers (that is, not business filers) will file either a chapter 7 or chapter 13 bankruptcy in Colorado 99.9% of the time. There are big differences between those two chapters that can have a significant impact on whether or not my client keeps her home.
Just to get a popular myth out of the way, it is possible to keep your home in a chapter 7 bankruptcy, but that doesn’t mean you’re going to want to file a chapter 7. Setting aside other reasons why someone might file a chapter 13 instead of a chapter 7 (such as income), how much equity someone has in their home is going to be the primary factor for the advice I give someone about what chapter they should file.
In a chapter 7 bankruptcy, if you have too much equity, you risk losing your home to the bankruptcy trustee. He’ll sell it and use any money leftover after he pays off the mortgage and give you your homestead exemption amount to pay your creditors. Make no mistake: he’ll sell it. He doesn’t care if you need it to shelter your family.
In a chapter 13, how much equity you have in your home affects how much you’ll have to pay your creditors during your three to five repayment plan.
What Is The Colorado Homestead Exemption?
The homestead exemption is the rule that sets forth how much equity can be protected from your creditors, inside or outside of bankruptcy. As of this writing, the homestead exemption protects $75,000.00 in equity or $105,000.00 if you are disabled, over the age of 60, or have a dependent living in the home who is over the age of 60 or disabled.
How Can A Bankruptcy Attorney In Colorado Help Me Keep My Home?
If someone has close to, or more than, $75,000.00 in equity, I am probably not going to recommend chapter 7. One way I might recommend it is if they have the ability to pay the trustee any equity in excess of the homestead exemption. Let’s say my client has $85,000.00 in equity. The trustee wants that unprotected equity. If there is a way to give it to him, he won’t need to sell the house. So, in this example there is $10,000.00 in excess equity. The trustee doesn’t care where that money comes from. You could cash out a retirement account or even a relative could pay it. As long you pay it, everything’s cool. If you don’t pay it, then the trustee will sell your house.
I’m not going to file a chapter 7 in this situation without a lengthy conversation about the significant risks this path presents. I’m going to document the risks as well. And then I want to hear what my client’s plan for paying the trustee is. Unless it’s rock solid, I am going to steer them away from a chapter 7. If the plan is to buy a bunch of lottery tickets, I don’t want anything to do with that chapter 7.
If chapter 7 isn’t a good or viable option, then we’re going to discuss chapter 13 bankruptcy. The best thing about chapter 13 is that there isn’t any risk of losing your home. The bankruptcy court doesn’t put any liens on it. You either comply with your chapter 13 repayment plan or you don’t. If you don’t, the court will dismiss your case and you’ll lose the court’s protection from your creditors, which could lead to lawsuits or foreclosure if you’re behind on your mortgage payments.
In a nutshell, chapter 13 requires you to pay some or all of your debt. How much you have to repay depends on a few different factors, but for this conversation, we’re going to focus on any unprotected equity in your home. Using the example above where my client has $10,000.00 in unprotected equity. She can keep the house and not worry about the bankruptcy court selling it, but she is going to have to pay her unsecured creditors at least $10,000.00 over three (minimum) to five (maximum) years. On top of that, she is going to pay some attorney fees and trustee fees.
Chapter 13 allows a filer to get her debt under control while giving her the peace of mind that nothing will happen to her home. The other benefit is that, if necessary, she can bring her mortgage current over the term of the repayment plan.
Schedule A Free Consultation With A Colorado Bankruptcy Attorney
Bankruptcy is the most powerful weapon you have to fight overwhelming debt and get your finances back on track. The first step to take is to schedule a free consultation with an experienced Colorado bankruptcy attorney. You can make an appointment by clicking here.