Home Equity in Chapter 13 Bankruptcy: You Won’t Lose Your House in a Chapter 13—But You May Pay More
Increasing home equity with rising real estate prices in many areas of Metro Detroit is one thing that many are thankful for this Thanksgiving holiday.
However, when considering Chapter 7 or Chapter 13 bankruptcy, it is important to remember that all assets, including your home, are at issue in the bankruptcy process.
In a Chapter 7 bankruptcy, the consequence of having “too much” home equity can, in some circumstances, be that your home is seized and sold off by the Chapter 7 Trustee assigned administer your case by the Bankruptcy Court in order to repay some of the debt you owe your creditors.
In a Chapter 13 bankruptcy, there is never any liquidation or sale and seizure of assets, regardless of the amount of your home equity, but there is still a consequence that may affect the affordability of your particular Chapter 13 bankruptcy process.
Home Equity and Asset Protection in Chapter 7 and Chapter 13 Bankruptcy
Home equity and all other assets, from your automobile to your comic book collection, bank account, wedding ring, and so on, all become assets of what is called the “bankruptcy estate” upon the filing of the bankruptcy petition.
In either a Chapter 7 or a Chapter 13 bankruptcy, an individual called the “Trustee” is assigned to your bankruptcy estate to “administer the assets.”
In a Chapter 7 bankruptcy, as noted above, this means that the Trustee is empowered to take your stuff and sell it off.
However, assets of the bankruptcy estate can be (and, in the majority of cases, are) fully protected from such liquidation by the application of what are called “exemptions” to each of your assets in your bankruptcy petition schedules.
The “exemptions” are provisions from the U.S. Bankruptcy Code (the Federal statute governing the bankruptcy process in the U.S.) or, alternatively, Michigan state law, which allow certain types of property to be exempted or removed from the bankruptcy estate up to certain dollar value caps.
For example, currently, the exemption in the U.S. Bankruptcy Code for jewelry is $1,600.00. So, if you have a very nice watch with a fair-market value of $1,000.00, it can be fully protected from seizure by the Chapter 7 Trustee because its value is less than the value of the jewelry exemption.
Home equity likewise needs to be exempted in order to retain the real estate in Chapter 7 bankruptcy.
Currently, the “homestead” exemption aimed at protecting equity in the home you actually reside in (there is NO exemption for non-primary residential real estate) is $23,675.00 under the Bankruptcy Code’s exemptions.
Under Michigan’s separate exemptions, $38,225.00 in equity can be exempted, or $57,350.00 if you are over the age of 65 or disabled.
Michigan also has a separate exemption for properties owned as “tenancies by the entirety,” which will—when applicable—exempt the entire amount of a home’s equity. However, this exemption is only occasionally applicable is it requires ownership in deed by a marital couple, one in bankruptcy and one not, and holding absolutely no joint debt whatsoever.
HOME EQUITY AND CHAPTER 13 BANKRUPTCY: The Best Interest of Creditors Test
No property of any sort is liquidated in a Chapter 13 bankruptcy, so do you still have to go through the trouble of listing all of your stuff out and exempting it?
In a Chapter 13 bankruptcy, there is still a negative consequence of having “too much” non-exempt property.
That consequence is not losing the property, however.
The Chapter 13 Trustee has an entirely different job than the Chapter 7 Trustee in administering your bankruptcy estate. Because of Chapter 13’s own “negative consequence,” you and your bankruptcy attorney must still list and, to the extent possible, exempt all of your property.
What is that consequence? It is the requirement that you must pay some minimum amount of money to your “unsecured” creditors, to the extent of the dollar-value of your non-exempted property.
This is called the “Best Interest of Creditors Test,” or (as Chapter 13 Trustees and the Chapter 13 plan form call it) “the Liquidation Analysis.”
In short, this “test” requires that your unsecured creditors (who get paid last in a Chapter 13 payment plan, after your Trustee, your attorney, secured creditors, and “priority” unsecured creditors such as the IRS or a child support or alimony recipient) cannot receive less than they would have received if you had filed a Chapter 7 bankruptcy and had some property seized and liquidated by the Chapter 7 Trustee.
For example, imagine owning a diamond ring that could be sold for $10,000.
In a hypothetical Chapter 7 bankruptcy, you could exempt $5,000 of its value with the jewelry exemption and other available exemptions, the hypothetical Chapter 7 Trustee would take the ring, sell it, give you back the $5,000 you could exempt and the distribute the remaining $5,000 to your unsecured creditors.
In a Chapter 13, no one takes the ring from you—but your unsecured creditors must be receiving (as a group, not individually) at least $5,000 from your Chapter 13 payment plan in order for the Bankruptcy Judge assigned to your case to approve or “confirm” the plan.
Therefore, if your monthly Chapter 13 plan payment, which is paid to the Chapter 13 Trustee and is ordinarily simply “what is left over” out of your take-home pay in an average month after necessary household expenses are deducted from it, is insufficient to pay that $5,000 to your unsecured creditors (in this example), you must increase your plan payment (by tightening your expenses) in order to engineer that result.
Sometimes, this makes Chapter 13 unaffordable to people on a monthly average basis.
However, this is never something that a lay person attempting to file a Chapter 13 bankruptcy without the assistance of an experienced bankruptcy lawyer is ever going to calculate or determine properly. It is something that a “pro se” (no attorney) debtor will find out the hard way—after filing the Chapter 13 bankruptcy case.
Home Equity in Chapter 13 Bankruptcy: The Bottom Line
The bottom-line impact of home equity in Chapter 13 is that it can sometimes render your “pay what you can afford to pay”
Chapter 13 is a process of paying creditors “what the Bankruptcy Code thinks they deserve to be paid.”
This can fail to jibe with the reality of a person’s actual, real-world budget.
The real bottom-line is that, with rising home values in Michigan, the available homestead exemption amounts are simply too low. But they are what they are, and those considering Chapter 13 must deal with the letter of this particular aspect of the law.
It is crucial that anyone considering Chapter 13, for this or a variety of other reasons, retain an experienced Michigan bankruptcy attorney in order to correctly utilize the available exemptions and to maximize the protection they are entitled to under law.
Attorney Walter Metzen has represented thousands of consumers in Chapter 7 and Chapter 13 bankruptcy cases in Michigan. A Board Certified Bankruptcy Expert, Attorney Metzen has dealt with bankruptcy and business ownership issues for over 30 years.
The Law Offices of Walter A. Metzen & Associates offers free consultations for those interested in the bankruptcy process and is experienced in determining and advising as to the best course of action when filing a Chapter 7 or Chapter 13 bankruptcy in Michigan.