calculatorThere are many variables involved in any bankruptcy case. The best thing to do is to call us. The first consultation is free.

Will I Lose My Home Equity During Bankruptcy?

Owning your own home is great. It’s yours – or will be, when you pay it off. And you can use it to build equity. With luck and foresight, you may be able to sell it later for much more than you paid for it.

It may not seem like that when you’re in financial difficulties though. For homeowners who are in serious financial trouble, the first thought is almost certainly going to be: will I lose my house?

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The good news: you won’t necessarily lose your house because of nonpayment.

But what about the equity I’ve built up?

In California, the biggest thing you need to know is that the law in the Golden State mandates legal limitations which may affect how much of your home equity can be affected by bankruptcy.

It’s possible that your home equity may exceed what is possible under Chapter 7 bankruptcy. However, you would still have the option of Chapter 13.

Chapter 13, rather than wiping out your debt, allows you to reorganize it. The bankruptcy court will set up a payment plan which will take between 36-60 months. There are variables which we can discuss with you, but your plan may cover some or all of your debt. If it doesn’t cover it all, what’s not part of the court-mandated plan is ultimately discharged.

In other words, if your home equity exceeds the exemptions by, say, $20,000, you are required to pay that back.

If you are only able to pay your mortgage and simply can’t pay your other creditors, they will likely file suit against you. Assuming they win judgment, you will have a lien placed against your house.

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A lien is a legal claim of one person against the property of another which will serve to repay an outstanding debt. Ultimately you must repay the debt or your creditor(s) may sell your property to receive payment.

Surprisingly, a lien may work in your favor: as long as the law in your state does not allow your creditor you can stay in your house. Interest will accumulate, but your home won’t be seized.

In years past, people could simply refinance their loans, but since the housing crisis, that option is largely gone. You shouldn’t count on being able to access your equity by refinancing.

Whatever you do, don’t try to game the system by, for instance, having a friend or relative put a pre-emptive lien on the property. And if you’re in financial distress, don’t try to get out from under by simply putting your property in a trust. This may end up with you facing fraud charges and the trust won’t keep your creditors out either.

Bankruptcy court is not the place to try tricks like this. There will be lots of questions and among them will be the most basic: where’s the money? It’s just not a smart thing to do.

What is a smart thing to do is to talk to an experienced bankruptcy attorney. We’ll be happy to talk to you about how to protect your house and equity a during bankruptcy case.

Give us a call today.