Bankruptcy filers often wonder if they can keep their homes. What happens to home equity is a concern for many as well. California has a homestead exemption that can protect some of your home’s equity in a bankruptcy case. Our Orange County bankruptcy attorney can determine if you qualify for a bankruptcy home equity exemption, but here’s a look at what this all means.
The Effect of Equity on Bankruptcy
Home equity is the market value of your home minus the amount you owe on the mortgage. If your home is valued at $300,000 and you owe the bank $250,000 on it, you’ve got $50,000 in equity (which a court can use to pay off your debt). The debt on your house not only includes your mortgage. It also includes loans you’ve taken on home equity in addition to lines of credit or any liens you have.
An exemption protects your equity up to a certain amount. What happens next depends on the type of bankruptcy you file for:
Chapter 7 Bankruptcy
The court considers the amount of equity remaining after the exemption. This amount will be used to help pay off your debts. If you have little or no equity in your home, you’ll be allowed to keep it since little money would be obtained by selling it. Having lots of equity means the court may decide to sell your home to pay off creditors. But if you owe more than the house is worth, you won’t need the exemption at all.
Chapter 13 Bankruptcy
After adding up your assets, the court figures equity into what’s available to pay unsecured creditors. The amount of equity available is reduced by the homestead exemption, so only what remains after the exemption is subtracted is considered. Chapter 13 is designed to help you keep your house during bankruptcy. However, it is quite complicated, so receiving help from an Orange County bankruptcy attorney is recommended.
What Is the Homestead Exemption Amount?
California residents must use the state’s bankruptcy exemption system rather than the federal system. There are two separate systems in California, which are independent of one another (you can’t mix and match benefits from both). One system allows homeowners to exempt up to $600,000 of equity, while the second system can exempt up to $31,950 in equity. These amounts were last updated by the California Judicial Council on April 1, 2022.1
Do I Qualify for an Exemption?
You can get a bankruptcy home equity exemption if you owe more than its market value and the exemption rules in your state apply to your situation. When you file for bankruptcy, you’ll need to fill out paperwork that requires listing what you owe. You’ll have to identify how much equity you have in your home and file what you believe is exempt, including your house, car, furnishings, and other valuables.
The various rules in qualifying for a homestead exemption can complicate a bankruptcy filing. Some of these rules include:
- If a married couple files for joint bankruptcy in California, this will not double the homestead exemption amount as it does in other states.
- You don’t need to file a homestead declaration with a county assessor. The exemption is claimed with your bankruptcy paperwork (Schedule C: The Property You Claim as Exempt).
- To claim an exemption’s full value in any state, you must have owned your home for at least 1,215 days.1
Can I Claim an Exemption Before a Bankruptcy Filing?
You can file a homestead declaration in your county even if you’re not filing for bankruptcy. Doing so can protect your home from judicial liens. But this isn’t always the case. You’ll have to file the declaration before a creditor, for example, sues you in court and gets a judgment against you. If it forecloses on your home, the proceeds cover what remains on your mortgage and other debts; you receive up to the homestead amount if anything remains (anything over it covers judicial liens).
Speak to an Orange County Bankruptcy Attorney
If you’re facing foreclosure or need to file for bankruptcy quickly to save your home, you’ll need an emergency bankruptcy attorney. But bankruptcy can be difficult in any situation. Even obtaining a bankruptcy home equity exemption is complicated unless you have professional guidance. OakTree Law’s legal experts will help you through the process and find a custom solution based on your situation. To get in touch with a bankruptcy attorney near you, request an evaluation online or call 888-348-2609.