When planning to file for bankruptcy, it is highly recommended to consult with an experienced bankruptcy attorney. There are many factors that must be considered when filing for bankruptcy, and those that are not qualified in the field may not be able to asses all of these factors and determine if bankruptcy is the right option. Filling for bankruptcy may not be as simple as simply filing paperwork with he Court. One of the considerations that must be made when contemplating a bankruptcy is whether the debtor owns any real estate. If so, the second consideration is whether the debtor has any “equity” in this real estate. If the debtor has equity in and a chapter 7 bankruptcy is filed, the debtor may lose this property. Below, I will explain how.
What is equity?
In simple terms, equity is the difference between the value of a property and the liens secured against that property. For the purpose of filing a bankruptcy, the value of property can be derived from an online search (Zillow.com, Redfin.com, Trulia.com, etc.), Broker’s Pricing Opinion (BPO) or by way of a formal appraisal. On the other hand, a “lien” is a security interest recorded against a property which secures a debt. For example, when a bank lends a person money to buy a home, they execute (and record) a Deed of Trust to secure their loan in case the person does not pay. Other forms of liens are judgement liens and tax liens.
For a Debtor to have equity in a property, the total of all liens must be lower than the value. For example, if a home is worth $200,000.00, the bank has a lien for $100,000.00 and there is a judgement lien in the amount of $50,000.00, the person will have $50,000.00 equity in the home ($200,000.00 – $100,000.00 – $50,000.00 = $50,000.00).
Why is Equity Important in Chapter 7 Case?
When a Chapter 7 case is filed, a Trustee is appointed by the U.S. Government to administer the bankruptcy estate. The Trustee is in charge of liquidating any assets that the debtor owns, and using the funds from those assets to pay creditors. In other words, the Trustee will sell anything of value unless it can be exempted. Individual debtors are often entitled for “exemptions”, which are certain amounts of money, depending on the type of property, that state law allows a person to keep away from creditors. An exemption can prevent a trustee from selling a property, if the amount of equity in the property is less than the exemption (since the exemption will “preserve” all of the equity). Nonetheless, there are situations in which Debtors may not be able to use an exemption to preserve equity, or an exemption is not enough to cover all of the equity. Those situations can result in the Trustee selling the property (whether the debtor likes it or not). For example, if a debtor owns a rental property with $400,000.00 in equity, the debtor will not be able to use any exemption to preserve this equity, and the Trustee will likely sell the property and use the proceeds to pay the debtor’s creditors. Thus, if the debtor seeks to keep the rental property, he should probably not file a bankruptcy.
Consult With A Qualified Attorney Now!
If you or your loved one is considering bankruptcy, and believe that you may have equity in your property, consult with a bankruptcy attorney before deciding your next step. Katz Law is here to help those who are considering filing for bankruptcy. At Katz Law, we are qualified in handling bankruptcy cases. If you need bankruptcy advice, contact a Los Angeles attorney now! Our attorney at Katz Law is ready to help you immediately!
Call us now at (844) KATZ-LAW for a FREE CONSULTATION!