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What Happens to The Equity in My Home After I File Bankruptcy?

Feb. 7, 2022

Home values have increased substantially over the last several years. As a result, many individuals and families have gained a significant amount of equity in their residence. The question then is what happens to all the equity you have built up when you file a bankruptcy? Does it go to pay creditors? Do you keep it? The answer, as always is “it depends.”

In a bankruptcy case you give up non-exempt assets in exchange for the bankruptcy discharge (Chapter 7) or you repay the value of any non-exempt assets to the creditors (Chapter 13). Bankruptcy law allows you to exempt or protect certain assets from creditors and the bankruptcy estate. Generally, you will use your state exemptions when filing for bankruptcy unless you have not resided in your current state for two consecutive years. If you have lived in your current state for less than two consecutive years, then you will either use the exemptions of the state you last resided, or the federal bankruptcy exemptions found under 11 U.S.C. §522. You should speak with an experienced bankruptcy attorney to determine what exemptions apply to your situation.

Under Arizona law, an individual or married couple is allowed to exempt or protect up to $250,000 of equity in their homestead. The exemption increased from $150,000 to the current $250,000 on January 1, 2022. This means that equity up to $250,000 is exempted from the bankruptcy estate. However, there is a catch: under federal law, you must have acquired the property more than 1215 days before your bankruptcy is filed. Otherwise, the exemption is limited to about $170,000. This fact is very important to be aware of if you have acquired your home in the last three years or so.

Assuming you have lived in Arizona for over two years and acquired your home more than 1215 days prior to filing your bankruptcy, you will be able to exempt up to $250,000 of equity in your home when you file a bankruptcy. The issue then is: what happens to your equity after your case is filed? The answer depends on what chapter of bankruptcy you filed.

Assuming you filed a Chapter 7 bankruptcy in Arizona on or after January 1, 2022, you can protect up to $250,000 of equity in your home. However, be aware that appreciation over the $250,000 homestead exemption that accrues after the filing of your bankruptcy case actually belongs to the bankruptcy estate and can be used to pay your creditors. In most cases, this is not an issue, as the equity is well below the $250,000 limit and the Chapter 7 case closes before any substantial appreciation accrues. However, some individuals are very close to the $250,000 limit when their case is filed, or their case stays open for a significant period of time causing appreciation to be an issue. For example, assume you have $245,000 of equity when your Chapter 7 case is filed and your case stays open for 12 months, which is very common. Now assume your home has increased another $30,000 in value during that 12-month period. In that situation, you will now have $25,000 in non-exempt homestead equity that must be turned over to your Chapter 7 bankruptcy Trustee. The Chapter 7 bankruptcy Trustee could force the sale of your home to recover any equity in excess of the homestead. You would be entitled to $250,000 of equity, but you would lose your home. To protect yourself from this issue in a Chapter 7 bankruptcy, you should file a “Motion to Abandon Real Property” soon after filing your Chapter 7 case. The Motion to Abandon essentially forces the Chapter 7 Trustee to abandon any claim or interest to post-petition appreciation of your home from the bankruptcy estate. As long as you can document that your home has less than $250,000 of equity, you should be successful in removing your home from the bankruptcy estate and protecting any post-petition appreciation. Your bankruptcy attorney will be able to determine if the motion is necessary and file it on your behalf.

In a Chapter 13 you have a little more protection. While you are still limited to an exemption of $250,000 when you file your case, appreciation that occurs after the confirmation of your Chapter 13 Plan belongs to you—even if that appreciation is more than the $250,000 exemption. For example, assume you have $250,000 of equity when your case is filed, and your plan is confirmed/approved before any appreciation over the $250,000 exemption occurs. In that situation, all equity over the $250,000 exemption that occurs during the pendency of your Chapter 13 case will belong to you. This means that you won’t get to the end of your 3–5-year Chapter 13 and be required turnover the value of excess equity gained during the pendency of your case. If you had equity over the $250,000 when your Chapter 13 case is filed, you would simply pay the value of any non-exempt equity to your creditors over the life of the bankruptcy. However, appreciation that occurs after the confirmation/approval of your plan still belongs to you. The excess equity that must be paid to your creditors is capped at the value that exists at the confirmation of your plan.

If you own your home, there are several factors that must be considered before filing a Chapter 7 or Chapter 13 bankruptcy. At Treguboff Law, PLC we have the experience to review the specifics of your case and help you determine what option is right for you. Schedule a free consultation to meet with an attorney today.