If considering filing for Chapter 7 or Chapter 13 bankruptcy, obtaining a proper value for your home is one of the most important steps to take prior to filing your case.
If you are a homeowner, it is one of the most essential reasons that you should hire an experienced bankruptcy lawyer to represent you for your Chapter 7 or Chapter 13 proceeding rather than attempting to “go it alone” without legal assistance.
Why is this?
The quick answer is that a Chapter 7 bankruptcy filing can be a quick and brutal way to lose your home if you haven’t valued it properly in your bankruptcy petition. A Chapter 13 filing will not cause you to lose your house—but the odds of your success in the process will be greatly reduced.
A suspicious undervaluing of real estate in either form of bankruptcy can draw the attention of the US Trustee, the division of the US Department of Justice tasked with ensuring the integrity of the bankruptcy process.
It is the US Trustee who prosecutes people for bankruptcy fraud in the right circumstances. Bankruptcy fraud is a Federal felony carrying a possible 5-year prison sentence.
Are those reasons dramatic enough for you?
The valuation of property in bankruptcy is one of the most important things to get right.
If you plan on continuing to be a homeowner after filing for bankruptcy, the valuation of your home is even more important.
So how do you value a home for bankruptcy purposes?
How to Value a Home Prior to Chapter 7 or Chapter 13 Bankruptcy
The first point to note here is that the home must be valued prior to the filing of a bankruptcy case.
If you’re scrambling to value your home after filing your own Chapter 7 without an attorney, you’re likely going to encounter a great deal of difficulty in preserving your property—and you’ll be asked to justify the number you must have inserted into your petition schedules to get to that point.
Sound far-fetched? You’d be surprised. The Bankruptcy Court’s database of case-law is littered with such cases.
People will risk the roof over their heads to avoid spending a few bucks on a lawyer.
Don’t be one of those people!
If your home was recently purchased from a seller who was not a relative and you paid fair market value, the present value will likely be very close to the price you paid for the home. Some properties such as condominiums or homes that are very similar in size and year built can be easier to estimate their value base on properties that recently sold in the neighborhood. Online resources such as Zillow or Reator.com can be helpful when estimating the value of your property, however these websites should only be used as a rough estimate. If there is any doubt as to the value, you should obtain a professional appraisal.
The next recommendation is that you do not, in fact, value your home.
That’s right. You don’t do it. You are not, in all likelihood, a professional home appraiser. The bankruptcy lawyer you hire, on the other hand, will be able to refer you to a professional home appraiser.
But not just any appraiser. A broker’s price opinion, or BPO, from a realtor who happens to be your cousin’s sister-in-law may be better than nothing in terms of valuing your home for bankruptcy—but not by much.
The opinion of an appraiser who has only provided valuations for realtors for home sale purposes is also better than nothing. By slightly more than the realtor’s BPO.
That’s about it.
You need to approach your home’s valuation as if preparing for litigation in court as to the home’s value.
That is, in fact, what you are doing.
You need the right appraisal, premised on the right information, from the right professional appraiser with the right licensing and certification—and experience—if you want to come out on top in this potential litigation.
With whom are you litigating? The Chapter 7 or Chapter 13 Trustee assigned to your bankruptcy case.
Let’s discuss those individuals and then return to question of the right appraisal to obtain.
Who Are the Chapter 7 & Chapter 13 Bankruptcy Trustees?
In either form of personal bankruptcy, the Court appoints so-called Bankruptcy Trustees to administer the case on behalf of what is known as “the Bankruptcy Estate” and its creditors.
Chapter 7 Trustees
A Chapter 7 bankruptcy is known as a “liquidation bankruptcy.”
In a Chapter 7, debts are fully discharged without the need for any repayment at all. However, creditors may still receive compensation.
This occurs when a debtor has assets and property worth more than can be protected in the Chapter 7 process by the debtor.
These protections are known as “exemptions.” They are statutory provisions that state that a debtor in bankruptcy can remove from the Bankruptcy Estate over which the Trustee has jurisdiction specific dollar amounts in value of certain types of property.
There is a Federal homestead exemption and an alternate Michigan state law-based homestead exemption allowing a certain amount—but only that amount—in equity value of a home in which the debtor actually resides to be exempted (removed) from the Bankruptcy Estate.
And thus protected.
Otherwise, it is the role of the Chapter 7 Trustee to seize non-exempt property and to liquidate it from the benefit of the Estate creditors.
That is, the Chapter 7 Trustee will hire a realtor to market, show, and sell the house—and evict you and/or move to deny your bankruptcy discharge for failure to cooperate with the liquidation if you do not do so.
Moreover, the Chapter 7 Trustees have had approved by our local Eastern District of Michigan Bankruptcy Court judges a procedure known as a “carve-out,” in which a deal is struck with the mortgage creditor that allows the Trustee to sell and receive a payment for a debtor’s home which is actually “underwater” relative to the mortgage balance. Although it’s rarely done, it can create equity in a home where basically none existed before the bankruptcy case was filed.
In short, the Chapter 7 Trustees are extremely aggressive and extremely creative when it comes to liquidating real estate.
Chapter 13 Trustees
In a Chapter 13 bankruptcy, on the other hand, no assets are liquidated at all.
Thus, if you need the protection of the Bankruptcy Court to deal with your debt but have concerns regarding the value of your home, the best form of bankruptcy for you is likely a Chapter 13.
A Chapter 13 bankruptcy is a “reorganization” bankruptcy rather than a “liquidation” bankruptcy.
In a Chapter 13, you make a monthly plan payment equivalent to your net monthly income (take-home household pay minus necessary average household expenses) to the Chapter 13 Trustee.
The Trustee then disburses those funds out to your creditors in a priority order set forth in the Chapter 13 payment plan drafted and filed by you and your bankruptcy lawyer.
Income and expenses drive the math and the question of creditor compensation, not liquidation of assets.
However, in a Chapter 13 bankruptcy, property must still be valued and, when possible, exempted.
Ordinarily, the low-priority, unsecured creditors of a Chapter 13 Bankruptcy Estate are not required to be paid any minimum amount of money. As a pool, they may receive 1 cent to split amongst themselves, the balance of what is owed by the debtor then totally discharged as in a Chapter 7.
However, where the debtor has property that cannot be fully exempted, the value of the non-exempt portion of that property does constitute a minimum amount that unsecured creditors must receive.
For example, if your home is appraised at $500,000, you owe $400,000 on its secured mortgage, and can exempt another $24,000, that leaves a non-exempt equity balance of $76,000.
The unsecured creditors of this Chapter 13 Bankruptcy Estate must receive, as a pool, $76,000 from the Chapter 13 payment plan.
The debtor’s monthly plan payment must, then, be large to pay the Trustee’s fees, his or her attorney’s fees, mortgage payments, car payments, any tax or other priority debt—and then still leave $76,000 for the unsecured creditors.
That is something of an extreme example, but, in the current high-value housing market, it is not out of the question, either.
Further, although a Chapter 13 Trustee does not liquidate property, the Chapter 13 retains the power to refer a case to the US Trustee for investigation or to move to convert the case to Chapter 7 if “bad faith” circumstances exist.
This would be done in order to allow a Chapter 7 Trustee to seize and liquidate property that is, say, purposefully and fraudulently undervalued in the petition schedules.
Home Valuation Before Bankruptcy: Proper Appraisal Required
That all explained, it is plain that it is the Chapter 7 Trustee in particular with whom you must be prepared to litigate when valuing your home prior to filing for bankruptcy.
However, you must be prepared to justify your home’s stated value with a documented appraisal in Chapter 13 as well, or the Chapter 13 Trustee will object to the confirmation of your payment plan, refer your case to the US Trustee, or, in extreme circumstances, move to convert you back to Chapter 7.
Thus, one of those most crucial forms of documentation you will obtain and provide to your bankruptcy lawyer will be a proper appraisal—by a proper appraiser.
Not your best guess. Not your realtor’s BPO. Not an appraisal by a less-than-fully qualified or experienced appraiser with only real estate sales experience.
The qualifications you will want for your appraiser are as follows:
- Licensed by the State of Michigan;
- Certified in Residential Appraisal;
- Experienced with bankruptcy-specific valuation;
- Experienced in acting as an expert witness in Bankruptcy Court;
- Experienced in appraising properties in your geographic area.
What you are NOT looking for in an appraiser are these qualities:
- Cheap pricing;
- Friend of the family;
- Recommended by somebody on Facebook;
- Recommended by your realtor;
- Is a realtor and not an appraiser.
- Is licensed but NOT also certified.
The case-law of the Eastern District of Michigan Bankruptcy Court has repeatedly favored the valuations of appraisers who are both licensed and certified.
Valuing My Home for Bankruptcy Purposes: The Bottom Line
How do you find the right sort of appraiser and obtain the right sort of appraisal?
You hire an experienced bankruptcy attorney to assist with your case. We know who the reliable appraisers are whose valuations will stand up in court against the Trustees’ (and mortgage servicers’) appraisals.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert and has successfully represented thousands of Chapter 7 and Chapter 13 clients for over 28 years.
If you are a homeowner considering filing for bankruptcy, contact us to discuss your home valuation and your options in a free, confidential consultation.