As strange as it sounds, your home may have more equity in a Michigan Chapter 7 bankruptcy proceeding than it does outside of bankruptcy.
How is this possible? Is not the value of a home based on its physical details and condition in relation to the comparative recent sale prices of similar homes in your area? Isn’t it just the number that shows up when you plug your address into Zillow?
As to Zillow, that’s a well-known no.
As to the other questions, sure, that’s what any realtor in Metro Detroit will tell you. When you are interested in selling your home, a realtor will indeed whip up a possible sales and asking price based on those factors, as well as others such as the quality of the local school system, property tax rates, and other factors.
However, when you file a Chapter 7 bankruptcy in Michigan, none of that matters.
The amount of money that your realtor thinks you can sell your home for is helpful information for your Metro Detroit bankruptcy attorney to consider when speaking with you about a possible bankruptcy filing in an initial consultation—but it won’t be a number that you should premise a Chapter 7 filing upon.
Entering a Chapter 7 bankruptcy with an inaccurate home valuation number in mind is a good way to lose your home.
Why Does Your Home Equity Matter in Chapter 7 Bankruptcy?
First, why does the amount of your home’s equity matter in Chapter 7 bankruptcy?
The reason is that Chapter 7 bankruptcy is a “liquidation” form of bankruptcy. That is, the Chapter 7 bankruptcy process does not require you to repay any of the debts you owe to your creditors. Chapter 7 bankruptcy provides the benefit of a full discharge of your debt, in other words.
However, in return for this benefit, you can, in some cases, have your assets liquidated in order to generate a pool of money from which your creditors will be at least partially repaid.
Most people who file Chapter 7 bankruptcy in Michigan do not, however, lose any property. This is because the US Bankruptcy Code allows you to “exempt” or remove certain types of property up to certain value limits from the “Bankruptcy Estate” that is created automatically when you file a bankruptcy case.
Property is “protected” in Chapter 7 bankruptcy when it has been fully “exempted.” This occurs when you apply one of these statutory exemptions to an item of property listed in your bankruptcy petition and that exemption’s dollar value cap is not less than the property’s full fair-market value.
When this is the case, that property cannot be seized and liquidated by the Chapter 7 Trustee for the benefit of your creditors. It has been removed from your Bankruptcy Estate.
There are different exemptions for different types of property, to be clear. Those exemptions have different value-caps in dollar-value terms. Not every type of property has an exemption that will cover it at all.
Thus, the question of the value of any property that you own is, along with income-based eligibility questions, the weightiest conversation you can have with your bankruptcy attorney about whether or not to file a Chapter 7 bankruptcy.
Your primary residence does have such an exemption available to it. The so-called “Homestead Exemption” available under Federal law applies only to the home which is your principal residence. That is the only home owned by most people. However, it does have a dollar-value cap. As of this writing, the value of the homestead exemption is $27,900.
In today’s real estate market in southeast Michigan, a “normal” home that was underwater relative to its mortgage encumbrances 10 years ago can now easily have that much or more equity.
Real estate that is not your primary residence has no exemption at all in Chapter 7 bankruptcy, other than under what is commonly referred to as the Federal “wildcard exemption” which can apply to any property and is presently $15,425.00.
Thus, you really can lose your home in Chapter 7 bankruptcy if you misjudge the value of your home and the amount of equity you have in the property.
The 3 Reasons For Increased Home Equity In Chapter 7 Bankruptcy
It is important to keep in mind that the Homestead Exemption and the alternative real estate-related exemptions available under Michigan State law are required to exempt and protect only the value of your home’s equity.
What you need to protect in a Michigan Chapter 7 Bankruptcy is not the full value of the home, in other words.
The equity of a home is, of course, the value of the home after mortgage balances and other encumbrances are factored out. For example, a home worth $200,000 worth a $100,000 mortgage balance has $100,000 in equity.
That seems like easy enough math, right?
So what are the 3 reasons why you may have more equity in your home in Chapter 7 bankruptcy than you think?
Improper Valuation or Appraisal
The first reason why your home may have more equity in Chapter 7 bankruptcy than you thought it did is that your valuation is flawed.
Are you relying on a price opinion from your sister-in-law who just got her realtor’s license?
Not a good idea.
Valuation of real estate for bankruptcy purposes is a different exercise than valuation for prospective sales purposes. Not only are the considerations different but the extent to which a US Bankruptcy Court judge will find your valuation more credible than the one that will certainly be computed by the Chapter 7 Trustee will in great measure depend upon the qualifications of the person who arrived at that value for you.
Did you do it yourself? Based on Zillow’s valuation? That’s a zero-credibility valuation.
Did your sister-in-law the realtor do it a year ago when you considered selling the house? Did she work a little too hard to produce your ideal sales asking price by selectively selecting the comps in the opinion?
That’s a low-credibility valuation to a Bankruptcy Court judge. The Chapter 7 Trustee’s higher valuation will win at an evidentiary hearing (trial).
Did you have a proper appraisal conducted by a licensed and certified Michigan appraiser with specific prior experience not only with bankruptcy-purposed valuation but also with experience testifying in bankruptcy evidentiary hearings?
That’s a good valuation.
Your bankruptcy lawyer will know who the experienced appraisers are. You probably do not.
Judgment Liens and other Voidable Liens
Your mortgage is not the only possible encumbrance on your home’s title on the records over at the County Register of Deeds.
Your home’s title may also be clouded by tax liens or, significantly here, judgment liens.
A judgment lien is a lien that can be recorded against your property by a creditor or other party who has obtained a money judgment against you in a Michigan State Court. The perfection of a judgment lien is one of the ways, along with garnishment, that a judgment can be executed in the State of Michigan.
If you have a judgment lien recorded against your property, this may seem to you to have reduced your home’s equity to the point where it can now be exempted and protected in a Chapter 7 bankruptcy.
Not so fast, however.
A Chapter 7 Trustee has the power to “avoid” (or remove) a judgment lien that “impairs the exemptions” available under the Bankruptcy Code.
This is accomplished by simple motion, and it is not a difficult motion for a Chapter 7 Trustee to win.
Once a judgment lien is successfully avoided, your home may have enough equity in it to justify seizure and liquidation by the Chapter 7 Trustee.
Chapter 7 Trustee Carve-Out
The possibility of a Chapter 7 Trustee “carve out” is a difficult concept to understand.
In short, it is a negotiated agreement between your Chapter 7 bankruptcy Trustee and your mortgage holder to allow the Trustee to sell your home for a price that is potentially less than you owe on the mortgage.
It is a short sale, in other words, in which you hold no decision-making power.
It is outside the scope of this Article to discuss the specific legal mechanisms under which prevailing Eastern District of Michigan and other Bankruptcy Court case-law have determined support this maneuver.
Suffice it to say that, if it seems as though your home has no or little equity (below Homestead Exemption value-level) by just a hair, this is something you need to worry about.
Home Equity In Chapter 7 Bankruptcy: The Bottom Line
The bottom line is that, if you own real estate with any equity at all, or just barely has no equity, you cannot afford to attempt to file Chapter 7 bankruptcy on your own without experienced legal assistance.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has represented Detroit-area Chapter 7 and Chapter 13 bankruptcy clients for over 30 years.
If you are a homeowner and are considering filing for bankruptcy, contact us now to schedule your free, initial consultation.