Bankruptcy when your house has a lot of equity

  • Home Equity and Bankruptcy? What Happens? | WM Law

My house has a lot of equity and I want to file bankruptcy.  What can I do?

The answer to that question depends heavily on which state you live in and which state’s exemptions would apply in your bankruptcy and which type of bankruptcy you’re able to file.

For Kansas Residents

If you’ve been living in Kansas for at least the past two years then you must use the Kansas exemptions for bankruptcy, which include an unlimited exemption on the equity in your homestead (up to 1 acre within city limits or up to 160 acres if farmland) if you purchased your home more than 1,215 days before you file bankruptcy.

If you purchased your home less than 1,215 days before you file bankruptcy then your homestead exemption is limited to $160,375 (this number adjusts with inflation every three years), unless you purchased your current Kansas home using equity from an earlier Kansas home which was purchased more than 1,215 days before you file for bankruptcy.  The $160,375 limit on the current homestead equity exemption only applies to homes bought in one state through the use of equity from a home sold in another state.

If you’ve not been living in Kansas for at least the past two years, then another state’s exemptions or the federal exemptions will apply and you should consult one of our attorneys to determine what your homestead equity exemption would be.

For Missouri Residents

If you’ve been living in Missouri for at least the past two years then you must use the Missouri exemptions for bankruptcy, which include a $15,000 exemption on equity in your homestead.  You might be able to protect more than $15,000 if the property is owned as tenancy by the entirety, which protects assets owned as husband and wife against the debts of only one of the spouses.

If you’ve not been living in Missouri for at least the past two years, then another state’s exemptions or the federal exemptions will apply and you should consult one of our attorneys to determine what your homestead equity exemption would be.

Chapter 7 Bankruptcy

It’s easy to see that, if you’re eligible for a chapter 7 bankruptcy and have a lot of equity in your homestead, you’re better off as a Kansas homeowner than you are as a Missouri homeowner.

If you live in Missouri and have a lot of equity in your homestead, even if you’re eligible for a chapter 7 bankruptcy, you would probably want to do a chapter 13 bankruptcy instead (unless your property qualifies for tenancy by the entirety protections) because you have a lot better chance of keeping your home.

In a chapter 7, the bankruptcy trustee (i.e., the person who manages the case on behalf of the government and creditors) is authorized to sell your home if there is non-exempt equity (i.e., a positive net after fair market value minus the secured debts against the property minus your exemption amount minus closing costs minus the trustee’s fees).

Chapter 13 Bankruptcy

If you are not eligible for chapter 7 bankruptcy, or don’t want to lose your non-exempt assets, then chapter 13 bankruptcy is an option to consider.

In a chapter 13 bankruptcy, if you have non-exempt equity in your homestead you can keep your home as long as you pay your unsecured creditors at least what they would have received in a hypothetical chapter 7 case (i.e., the positive net after fair market value minus the secured debts against the property minus your exemption amount minus closing costs minus the chapter 7 trustee’s fees minus priority debts).  If your total projected Disposable Income is more than the value of your non-exempt equity then you would have to pay that higher amount to your unsecured creditors.

If you’ve lived in Kansas for at least the past two years it is less likely that unsecured creditors will be paid anything If you have significant equity in your homestead because of the unlimited homestead exemption (unless any of exceptions apply as outlined earlier).

If you’ve lived in Missouri for at least the past two years it is very likely that your unsecured creditors will be paid something, and perhaps completely, if you have significant equity in your homestead because of the mere $15,000 exemption (unless the tenancy by the entirety protections are in place).

Whichever type of bankruptcy you are seeking, you should consult with one of our experienced bankruptcy attorneys.

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