Will I lose my home if I file for Chapter 7 bankruptcy?
Arizona has its own set of exemptions that you may use when filing for Chapter 7 bankruptcy. In a Chapter 7 bankruptcy exemptions. If the value of your equity in your real or personal property exceeds the amounts of the state exemptions, the bankruptcy trustee may attempt to either sell off your property or reach some agreement with you regarding the unprotected equity in that property.
To give you an idea of how this might work, lets assume that you own a home worth about $300,000 and you have about $200,000 in equity in that home. In Arizona, the homestead exemption is worth $150,000 so you would have, at least on paper, about $50,000 in unprotected equity. In a Chapter 7, the bankruptcy trustee might consider attempting to sell off your home in order to capture the unprotected equity for your creditors. If he did so, you would likely take home $150,000, the amount of your protected equity.
Obviously, just because you have equity on paper doesn’t mean that your home would really be worth the trustee’s attention. Let’s say there was only $10,000 in unprotected equity on paper. Would it really be worth the bankruptcy trustee’s time and trouble to sell your home? Probably not. After all he would have to pay off considerable costs of sale and the real estate agent’s fee would likely eat up whatever unprotected equity was on that table.
As you can see, it’s critically important in an Arizona Chapter 7 bankruptcy filing to have a firm grasp of the amount of equity you have in your home. Relying on Zillow or a property tax statement is probably not going to do the trick. If you want to rest really well at night, obtaining an actual truthful appraisal would be a great step. Failing that, at minimum, I would want to have a CMA.
If your home equity really exceeds the statutory limit, Chapter 13 is likely well worth considering. Your home is never at risk in a Chapter 13 bankruptcy and you can always pay off a discounted amount of the unprotected equity back over three to five years to your creditors rather than risking an immediate sale. Given that Chapter 13 offers many other advantages over Chapter 7, this may be an option well worth exploring.
If you have been considering bankruptcy and have any questions about how your home equity would fare in a Chapter 7 filing, please contact one of our two Phoenix offices today at 602-598-5075 or 602-786-9175 so that we can help you get some clarity.