When you file for personal bankruptcy you are required to list all your assets. For many people, their house is their most valuable asset, and thus the asset that potentially could create the most problems in bankruptcy. It’s important to find out how much your house is worth for bankruptcy purposes.
The issue with a house lies in how much equity (fair market value minus the mortgage(s), lien(s), closing costs, etc.) there is. In other words, how much would the homeowner receive in net proceeds if he/she were to sell the house, or perhaps more importantly, how much would a Chapter 7 bankruptcy trustee receive if he/she were to sell the house?
So how much is a house worth for bankruptcy? These answer will depend, in part, on how the house is valued, the exemptions available in bankruptcy, who else has an ownership interest in the property, and, in Missouri, whether a married couple who own a house have any joint debts.
How to value a house for bankruptcy purposes can be a bit tricky depending on the local real estate market. In all cases, an independent appraisal will be an acceptable way to obtain a defensible opinion of the fair market value for a house. However, that can be expensive, with appraisals running anywhere from $300-$500 and might also be overkill. If the values of houses in your area have been increasing rapidly over the past year or so it is probably a good idea to make the investment in an appraisal.
Another, more affordable, option could be a Comparative Market Analysis (CMA) from an independent real estate agent. A Comparative Market Analysis is kind of like a “mini appraisal” and will generally give a reasonably close estimate of the fair market value for a house. Many real estate agents will do a CMA for free or for a small fee. This could be a really good option if house values in your area have remained relatively flat or have decreased in the past year or so.
If you live in a state (such as Kansas) which has a significant home equity exemption in bankruptcy, then it probably doesn’t matter as much how you value the house as long as it’s a reasonably good representation of the fair market value. The home equity exemption in bankruptcy is how you “exempt” and therefore keep the equity in the house … and thus if the exemption fully covers the amount of equity then there would be no reason for a chapter 7 bankruptcy trustee to sell your house. If, however, you live in a state like Missouri, which has a small home equity exemption (only $15,000), then you would probably have a difficult time keeping your home in a chapter 7 bankruptcy if your home equity is more than $15,000. That is why getting a solid and defensible valuation of the house would be important.
If you live in a state like Missouri which still has Tenancy by the Entireties available as a type of ownership and you and your spouse have NO joint debts then the amount of equity in the house can be protected pursuant to the Tenancy by the Entireties exemption. This could result in you keeping a house with home equity way more than the regular home equity exemption ($15,000) in Missouri.
If you own a house with other people, then you would need to determine the value of your equity in the house and then apply the available exemptions accordingly. For example, if you have a 1/5th ownership interest in a house you live in and the total overall equity in the house is $50,000 then your portion is only $10,000 and if the home equity exemption available in your state is enough to fully exempt that $10,000 then you would have no issues.
If you have too much home equity to exempt and would therefore lose a house in a chapter 7, you could still consider doing a chapter 13 in which you would be able to keep the house but would have to propose in your payment plan to pay to your unsecured creditors (e.g., credit cards, medical bills, etc.) what would have been available to them if the house had been liquidated in a hypothetical chapter 7 case.
If you have any questions about how much your house is worth for bankruptcy purposes, please contact one of our attorneys to help guide you through the process.