HOME EQUITY AND THE BANKRUPTCY ESTATE
When you file for Chapter 7 bankruptcy, everything that you own becomes an asset of what is known as “the bankruptcy estate.”
This “estate” is a legal construct, a sort of shell containing all property that you own, perhaps that you recently owned, and, in some cases, that you may yet come to own in the future. It is created by automatic function of law upon the filing of your Chapter 7 bankruptcy petition with the Federal Bankruptcy Court.
In a Chapter 7 bankruptcy (a “liquidation bankruptcy”), you are entitled to discharge and have forgiven all of the debts that are “dischargeable” under the Federal Bankruptcy Code, including credit card debt, medical debt, payday loans, vehicle loans and leases, and mortgage loans.
The flipside of this governmental benefit is that, if you own any property that is worth more than what may be protected in the Chapter 7 process, it may be seized, sold, and the proceeds used to repay some or all of the debt that you owe. Thankfully, in the vast majority of consumer Chapter 7 cases that I file, as well as those filed nationally, nothing is seized to pay the creditors.
Upon the filing of the Chapter 7, an individual known as the “Chapter 7 Trustee” is assigned to your case by the Bankruptcy Court. This person is the caretaker of the assets of your Bankruptcy Estate. He or she will seize your unprotected Bankruptcy Estate assets for the benefit of your creditors if able.
Real estate is an asset of your Bankruptcy Estate upon filing, just like any other property you may own. It, too, is subject to seizure and liquidation by the Chapter 7 Trustee.
Therefore, as the real estate market has improved over the past few years, the need to properly appraise real estate before filing a Chapter 7 bankruptcy has become vital.
HOW TO PROTECT REAL ESTATE IN CHAPTER 7 BANKRUPTCY
The vast majority of property owned by people filing Chapter 7 bankruptcies is not seized and liquidated, however. In most cases, no one loses anything at all.
The protections available for one’s property in bankruptcy under both Federal law and Michigan law are extensive. These protections are the “exemptions” enshrined in the US Bankruptcy Code and in Michigan statute which allow certain types of property up to certain dollar-value limits to be “exempted,” or removed, from the Bankruptcy Estate upon filing.
The US Congress, in drafting the U.S. Bankruptcy Code (the Federal statute governing the bankruptcy process), intended that people should obtain a true “fresh start” through the process. In other words, debtors in bankruptcy were not and are not intended to leave the process stripped of everything needed to make a full, constructive recovery.
When you hire the Law Offices of Walter Metzen & Associates, we will work with you to list and value all of your property, whether mundane household goods, cash bank balances, retirement accounts, and real estate to ensure that your assets are exempted to the full extent available under law prior to the filing of any Chapter 7 bankruptcy.
If your home or any other asset is not fully exemptible and safe in a prospective Chapter 7 bankruptcy, we will discuss whether or not a Chapter 7 is the best course of action for you.
If some percentage of the equity in your home is exposed, it may be best to consider a Chapter 13 bankruptcy, in which no assets are liquidated, or a non-bankruptcy alternative to dealing with your debt.
It is important to note that only a primary residence, in which you actually reside, is subject to the maximum homestead exemption in Chapter 7 bankruptcy. A rental or investment property with significant equity is always going to be problematic in a Chapter 7 unless its fair-market value is extremely low.
PROTECTING REAL ESTATE IN BANKRUPTCY: THE BOTTOM LINE
The bottom line is that you need to retain an experienced bankruptcy attorney to represent you if you are considering a Chapter 7 bankruptcy and own real estate. Risking the roof over your head in order to save money on attorney fees is not a worthwhile risk.
Contact The Law Offices of Walter Metzen & Associates now to schedule a no-cost, no-obligation initial consultation.