When considering Chapter 7 bankruptcy, a debtor must evaluate all his assets (house, car, bank accounts, etc.), to determine the value of what he owns and make sure that he will be able to protect his assets if he files Chapter 7 bankruptcy.
In recent years, home values have declined, so some debtors do not have equity in their home and they can file a Chapter 7 case without concern that the Trustee will try to liquidate their home. The Trustee is subject to the same secured debt as the debtor, so a property that is worth less than the loan amount will not interest the Trustee.
However, some potential debtors have owned their homes for a long time and still have substantial equity in the home. In such cases, a Chapter 7 case may still be an option. The debtor with equity in his home may be required to use a different exemption statute (a California Code section that protects assets in bankruptcy) than most California debtors. The debtor with equity would use California CCP Section 704 exemptions instead of the 703 exemptions.
Debtors using the 704 exemptions in California Chapter 7 cases get a much larger protection for home equity, but much lower protections for most everything else. When home equity requires use of the 704 exemptions, it is often more difficult to protect a car (especially if the car is owned outright or the loan balance is very low). It is also more difficult to protect bank accounts, stocks, tax refunds, and other cash-based assets. Moreover, the 704 home equity exemption is not unlimited. If the equity is too high, and the debtor wants to keep the home, Chapter 7 may not be an option for that debtor.
In cases where there is substantial equity in a home that the debtor wants to keep, an appraisal is a good idea to make sure that there will be no disputes as to the value (the Trustee does not have to accept the debtor’s valuation if he has evidence that it is wrong). If the appraisal shows an equity amount that can be protected using the 704 exemptions, bankruptcy may still be an option for that individual.
It is wise to discuss these issues with an attorney before filing to avoid the risk of losing your home for failure to use the correct exemptions.
For more information or a consultation, please call 661-210-5657, or e-mail mjf4bk@ca.rr.com.