Will Having Lots of Home Equity Affect My Chapter 13 Bankruptcy?

If you have significant equity in your house that is not exempt in bankruptcy, it could increase your Chapter 13 plan payment.

by:  , Attorney

In Chapter 13 bankruptcy, you are allowed to keep all of your property, including your home (even if you have lots of home equity). But in exchange, you must pay back a portion of your debts through a repayment plan. One of the factors that affect your Chapter 13 plan payment is the amount of nonexempt property you own. (Learn about  how the Chapter 13 bankruptcy plan payment is calculated.)

This means that the amount of your home equity could increase the amount you must pay through your Chapter 13 plan. Whether it will impact your Chapter 13 bankruptcy will depend on:

How Much Equity Do You Have in Your Home?

The first step in figuring out whether your home equity will affect your Chapter 13 bankruptcy is to determine the amount of equity you have. You can calculate your home equity by subtracting the outstanding balance on your mortgages (and other liens on the property) from the value of your home. If you don’t have any mortgages or liens on the property, the entire value of the home is your equity. (Learn more about  how to calculate your home equity.)

Can You Exempt Your Home Equity?

Each state (and the federal system) provides bankruptcy debtors with a unique set of exemptions that are designed to protect a certain amount of property in bankruptcy. To exempt the equity in your home, you will typically use a homestead exemption. (Learn more about  how the homestead exemption works.)

But the amount of your homestead exemption will depend on the state you live in when you file (or, in some cases, where you previously lived). If you can exempt all of your home equity, it won’t affect your Chapter 13 bankruptcy. But if you have a lot of nonexempt equity, it can significantly increase your Chapter 13 plan payment (discussed below).

Can the Chapter 13 Bankruptcy Trustee Sell Your Home?

Chapter 13 is a reorganization bankruptcy (as opposed to a liquidation bankruptcy like Chapter 7). This means that unlike in Chapter 7 bankruptcy, the trustee in a Chapter 13 case can’t sell any of your assets (including your nonexempt property) to repay your creditors. (Learn more about  the Chapter 13 bankruptcy trustee.)

But as we discussed, in exchange for keeping all of your property, you must propose a plan to pay back some or all of your debts in Chapter 13 bankruptcy. If you have lots of nonexempt home equity, you might have to pay back a significant portion of your unsecured debts through your plan (discussed below).

Nonexempt Home Equity Can Increase Your Chapter 13 Plan Payment

In Chapter 13 bankruptcy, the amount of your plan payment depends on factors such as:

Best Interest of Creditors Test and Your Home Equity

Under the best interest of creditors test, your Chapter 13 plan must pay your unsecured creditors at least an amount equal to what they would have received in a Chapter 7 case. If you can’t exempt all of your home equity, the trustee in a Chapter 7 bankruptcy can usually sell your home and distribute the nonexempt portion of the proceeds to your unsecured creditors. This means that you must pay your unsecured creditors at least the value of your nonexempt home equity through your Chapter 13 plan (which can increase your plan payment significantly). (Learn about  the best interest of creditors test in Chapter 13 bankruptcy.)

Example.  Michael owns a home worth $300,000. He has a mortgage with a $125,000 balance but no other liens on the property (meaning that Michael has $175,000 of equity in his home). But the homestead exemption in Michael’s state only allows him to exempt $100,000 of his home equity in his Chapter 13 bankruptcy. This leaves Michael with $75,000 in nonexempt home equity.

If Michael had filed for Chapter 7 bankruptcy, the trustee would likely have sold his home to repay his creditors with the nonexempt equity. This means that if Michael has no other nonexempt assets, he must pay his unsecured creditors at least $75,000 through his repayment plan. But keep in mind that in some jurisdictions you may be able to pay less because the court might take into account the hypothetical sale costs and trustee fees that would have reduced the amount creditors received in Chapter 7 bankruptcy.

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