I Have Equity in My House – Can I Still File for Bankruptcy?

Hands down the most common questions I receive from potential bankruptcy clients is regarding their family home. When you think about it, this should come as no surprise as this is often the family’s largest personal asset. In addition, there is often a tremendous emotional attachment to one’s home. Somewhere between the years of saving for a down payment and the blood/sweat/tears I have shed fixing up my own home, I have become pretty darn fond of it. I get it, people.

So, how is the family home handled in bankruptcy? First you must consider whether the debtor is filing for chapter 7 or chapter 13 bankruptcy. Remember that chapter 13 bankruptcy refers to a reorganization of debt and doesn’t usually involve the forfeiture of any personal property. There are some complexities that must be reviewed with an experienced bankruptcy lawyer – namely that property above the allowable exemptions may change the amount paid to unsecured creditors through your bankruptcy repayment plan – but for the typical chapter 13 debtor, bankruptcy is viewed as a way to repay debts at a reduced rate without having to turn over personal property as part of the bankruptcy estate. Thus with chapter 13 bankruptcy, there is little risk of losing your home so long as you can continue to pay any liens against it.

The more relevent question regarding filing for bankruptcy and home equity refers to cases of chapter 7 filings. Chapter 7  Bankruptcy is the most basic form of bankruptcy, in which a debtor has the opportunity to discharge most of his or her consumer debt using certain non-exempt property in partial payment off creditors.  A Chapter 7  Bankruptcy is a liquidation proceeding.  A person going through Chapter 7 turns over all non-exempt property to a bankruptcy trustee who uses that property to pay off the debtor’s creditors and in turn most or all of the debtor’s debt liability is discharged.

That being said, the point of a Chapter 7 Bankruptcy is not to leave the debtor destitute – can you imagine the havoc it would wreak if debtors lost everything in bankruptcy, and were then told to start fresh and, oh yeah,  don’t make the same mistakes again….In my opinion there would be a sharp increase in the percentage of repeat filers. Fortunately, I am not the only person of this opinion, which is why debtors are entitled to retain a designated subset of property classified as exempt.

In Arizona, the allowed values of exempt property can be found here. As you can see, residents of Arizona have the benefit of relatively generous property allowances – for those of you upset because you cannot retain your boat or luxury automobile, keep in mind that many other states have markedly lower exemption values. If you scroll down to the value for primary residence you will see that, in Arizona, you are allowed a homestead exemption of up to $150,000.

This exemption can be applied to interest in real property upon which debtor’s house sits, condominium or cooperative, mobile home, or mobile home in which debtor resides plus the land upon which the mobile home is located. Note that, unlike some exemptions, this may not be doubled by husband and wife. Thus an Arizona Chapter 7 Debtor, whether filing an individual or joint petition, is allowed up to $150,000 in exempt equity in their primary residence. Anything beyond this is likely considered part of the bankruptcy estate.

So, in a nutshell, if you are filing an Arizona Chapter 13 Bankruptcy you can likely keep your home, provided you continue to pay on any liens against it. If your are filing an Arizona Chapter 7 Bankruptcy, you are allowed to keep a primary residence with up to $150,000 in equity. Equity beyond this is considered part of the bankruptcy estate and thus you home may be subject to forfeiture and sale in partial fulfillment of you debt.

As with most question regarding filing for bankruptcy, this topic is not black and white. There is a marked grey area based on your specific set of facts. Thus I always recommend you speak with an experienced bankruptcy lawyer prior to proceeding with your filing. As always, I am an experienced Phoenix bankruptcy lawyer, experienced Casa Grande bankruptcy lawyer and experienced Tucson bankruptcy lawyer. I offer free bankruptcy consultations – just shoot me an email and let me know what time works best for you.