If you own a home, you will likely need to have it appraised before filing bankruptcy in Metro Detroit.
Thanks to web-based valuation sites like Zillow and Realtor.com, we all think we know what our homes are worth. These days, it can simply be Googled. Right?
While these online resources can be a helpful guide initially, they cannot be totally relied on when it comes to filing a bankruptcy petition. Home values have risen dramatically in Michigan over the past 5 years. Thurs, you cannot be too casual about valuing your home for bankruptcy purposes.
As a homeowner, filing a Chapter 7 bankruptcy in Ann Arbor, Southfield, Royal Oak, Ferndale, Bay City, and even Saginaw, Flint, and Detroit carries the possibility of having your home liquidated.
Why Must a Home Be Appraised for Bankruptcy?
Assets can be seized and liquidated in a Chapter 7 bankruptcy. In a Chapter 13 bankruptcy, assets are never liquidated.
Nevertheless, for either form of bankruptcy in Michigan, you are required to assign accurate values to all of your assets listed in your bankruptcy petition.
And you must list all of your assets and all claims to money or property that you may have. Without exception.
Why is this?
The basic premise of bankruptcy in Michigan and everywhere else in the US is that you are relieved of your obligation to pay most debts but in a “fair” way that does not leave your creditors simply holding the bag in every case.
While bankruptcy is a consumer protection right in the US (it is often a method of creditor collections in other countries), the US Bankruptcy Code maintains consideration for the creditors involved in your debt discharge.
In particular, if you are a high-asset, high net worth individual, you will not be able to ease through the bankruptcy process cost-free.
If you are high net worth, you will repay something to your creditors, whether through a Chapter 13 payment plan—or through Chapter 7 asset liquidation.
The value of your assets, therefore, is crucial to determining whether you are high net worth or not. And, if so, what property you may keep in a Chapter 7, or what you must pay in a Chapter 13.
Assets and the Bankruptcy Estate
How does the US Bankruptcy Court have jurisdiction over your assets and property?
When you file for Chapter 7 or Chapter 13 bankruptcy in Michigan, you automatically, under Federal law, create something called the Bankruptcy Estate.
The Bankruptcy Estate is a legal “house” containing everything you own or have a claim to own. The assets of the Bankruptcy Estate are essentially frozen for the duration of the bankruptcy proceeding. You cannot sell or transfer any property during your bankruptcy proceeding with a Bankruptcy Court Order.
The Chapter 7 and Chapter 13 Trustees are assigned by the Bankruptcy Court to serve as custodians or administrators of the property within the Bankruptcy Estate. Their primary interest is the rights of the “Creditors of the Bankruptcy Estate.”
That is, the Trustees’ job is to ensure that your assets are properly listed and disclosed, valued. Then, their further duty is to either seize and liquidate your assets if non-exempt in a Chapter 7 or to ensure that your creditors are paid their non-exempt value in a Chapter 13.
Read on for more information regarding the “exemption” (protection) of your assets in bankruptcy.
However, the crucial point related to having your home appraised before bankruptcy is that you are required to list and disclose your assets and, to the best of your ability, their accurate fair-market value.
You want to do this not only because you are required to, however. You want to have your home appraised before bankruptcy, among other assets, because it is in your best interested to do so.
Asset Liquidation in Chapter 7 Bankruptcy
As noted, assets must be valued properly in Chapter 7 bankruptcy because they are subject to liquidation.
This is how creditors are repaid in Chapter 7.
That said, it is well worth noting that the majority of Detroit and Michigan residents who file Chapter 7 bankruptcies do not lose any property. This is because of the ability of debtors in Chapter 7 to “exempt” property from the Bankruptcy Estate.
The US Bankruptcy Code (and, in limited cases, Michigan state law) includes a number of provisions allowing certain types of property to be exempted, or removed, from the Bankruptcy Estate.
These provisions are the “exemptions” referenced above.
There are different exemptions for different types of property, with differing value caps or limits. For example, there is an exemption for a single automobile that is driven by the filing debtor. The cap on this automobile exemption (as of this writing) is $4,450.
Thus, if you own a car free and clear that has a Blue Book value of $3,000, the automobile exemption can be applied to it—on paper, in your bankruptcy petition. Once done, the car will be fully exempted and essentially removed from the Bankruptcy Estate. The Chapter 7 Trustee will not be able to seize it and auction it off for the benefit of your creditors.
However, if the same was worth $5,450 in Blue Book value, you would only be able to exempt $4,450 of that value. You would have $1,000 in “equity” in that car.
Presuming no other exemption applied to help the situation, the Chapter 7 Trustee would take the car, sell it off, give you the $4,450 you were able to exempt, and then send the other $1,000 to your creditors. (Or, really, pay his towing company, his attorney, his auctioneer, his storage facility, his own percentage fee—and then send about $19 to your creditors.)
Alternatively, you can negotiate to pay the Chapter 7 Trustee $1,000 (or something) to allow you to keep the car.
In any case, you can see that it is worth having a car appraised before filing Chapter 7 bankruptcy if it appears to have excess equity.
This is the same reason to have your home appraised before filing bankruptcy.
The Liquidation Analysis of Chapter 13 Bankruptcy
Likewise, you also need to disclose and properly value your property for a Chapter 13 bankruptcy in Michigan.
Chapter 13, however, is not a “liquidation” bankruptcy. Instead, it is a “reorganization” bankruptcy.
That is, in Chapter 13, you reorganize the order in which and extent to which you repay your creditors. You do not discharge the debt entirely as in a Chapter 7 bankruptcy.
In Chapter 13 bankruptcy, you make a monthly payment to the Chapter 13 Trustee rather than to your creditors.
This payment amount is roughly equivalent to the “net” remainder of your household take-home pay, after necessary household expenses are deducted. If you have $200 left out of your family income after paying for necessary expenses, that is your Chapter 13 plan payment amount. If you have $2,000 left over, that is also your plan payment amount.
The Chapter 13 Trustee takes this payment and disburses it out to your creditors according to the terms of your Chapter 13 payment plan. Your plan must propose to pay creditors in a priority order mandated by the US Bankruptcy Code.
The Code requires that your Detroit bankruptcy lawyer’s and Chapter 13 Trustee’s fees are paid first. Next, secured creditors such as home mortgages are paid, along with any arrearage amounts. Then, lease or contract payment. After that, priority unsecured creditors such as the Internal Revenue Service and child support recipients are paid.
Finally, your non-priority unsecured creditors are paid last. These creditors receive only what is left over after all others are paid.
In the ordinary Chapter 13 case, there is no minimum amount of money that unsecured creditors must receive.
However, where assets are not fully exempt, this changes. In that case, the dollar-value of your non-exempt assets must be paid through your Chapter 13 payment plan to your unsecured creditors on a dollar-for-dollar basis.
If you have $5,000 in non-exempt equity in your home, your Chapter 13 plan must propose a payment that is large enough to distribute $5,000 to unsecured creditors after everyone else is paid first.
$200 per month won’t accomplish that.
Thus, the value of your home is crucial. Your home is the most valuable asset you probably own, and equity amounts are high in the Metro Detroit area now.
It is vital that you have your home appraised before filing bankruptcy—even a Chapter 13.
Doing a sloppy job of this valuation will cost you.
Who Is the Right Appraiser to Use?
So what appraiser is best for bankruptcy purposes?
For a start, you’ll notice that we are not using the word “realtor.” We are not using the word “brother-in-law.” We are using word “appraiser.”
A residential property appraiser is a specialized professional not only skilled but also licensed by the State of Michigan to provide an accurate opinion as to the value of a home.
However, not every property appraiser is equal, either. You need an appraiser who is both licensed and certified by the State of Michigan—and who has specific experience preparing appraisals for bankruptcy valuation purposes.
Even more particularly, you certainly prefer an appraiser who has experience sitting in the witness chair at a Bankruptcy Court “evidentiary hearing.” (An evidentiary hearing is a sort of mini-trial in which the judge decides the value of the home based upon expert witness testimony and documentary evidence—that is, the appraisal).
Does this describe your brother-in-law who just got his realtor’s license? Probably not.
A broker’s price opinion (BPO) prepared by a relator will not hold up in court against the appraisal commissioned from a licensed and certified appraiser hired by a Chapter 7 Trustee.
Realtors are wonderful people—but they have a bad habit of “finding” values for homes that coincidentally bolster the sale price they told you your house would fetch on the market.
Home Appraisal Before Bankruptcy: The Bottom Line
The bottom line with regarding to having your home appraised before bankruptcy is that, if you have or may have equity in your home, you should always consult an experienced Detroit bankruptcy attorney before proceeding.
Your bankruptcy lawyer will be able to refer you to the sort of appraiser described above. Your bankruptcy lawyer will tell you if you are playing with fire even considering filing for bankruptcy.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has successfully represented Chapter 7 and Chapter 13 homeowners in Michigan for over 30 years.
If you are a homeowner considering filing for bankruptcy, contact us now to schedule your free initial consultation.