Home Equity Exemption
Jan. 9, 2018
There is a limitation on the amount of equity an individual can have in his/her home and still be able to totally wipe out his/her unsecured bills. Presently the bankruptcy law permits one person to have equity in his/her home in the amount of $25,150. If two people jointly own their home, the law permits net equity of $50,300 in that home.
What this means in simple terms is that if a married couple (or 2 other joint owners) wants to wipe out their credit card bills, in order to completely wipe them out, the net equity in their home cannot exceed $50,300. There is also something called a wild card exemption which in certain cases will permit an additional sum of approximately $2,650 to be added to the $50,300. The exact amount of the $2,650 wild card that can be applied to the house depends on other facts of the case.
Here is an illustration of what this all means. Let's assume that we have a married couple with $50,000.00 in credit card debt that they are trying to wipe out. Let's further assume that this married couple owns a house together worth $100,000.00 and the mortgage payoff is $70,000.00.
Here is an example of how equity is determined. First of all, a 10% deduction is taken from the value of the house as theoretical costs of sale, on the assumption that if the house was sold, it would cost 10% to pay real estate commissions and other costs associated with the sale of the house. This brings the number down to $90,000.00. If the mortgage payoff is $70,000.00 we subtract $70,000.00 from $90,000.00 and we have a net equity in the home of $20,000.00. This amount of $20,000.00 is well below the $50,300.00 permitted and this couple can wipe out their unsecured debts (provided they meet the other qualifications for bankruptcy).
Now let's take another example. The same couple in the same house worth $100,000.00, the same unsecured bills of $50,000.00, however, the mortgage payoff is $20,000.00.
Here is what happens in this example. First we take 10% costs of sale which brings us down to $90,000.00. Then we deduct the mortgage payoff of $20,000.00 which now brings us to $70,000.00 net equity in the home. The net equity in the home of $70,000.00 is greater then $50,300.00 by $19,700.00. This means that the couple exceeds the legal exemption by $19,700.00.
What does this all mean? It means that this couple would be required to make payments equaling $19,700.00 towards their credit card bills. In other words, instead of wiping them out completely and paying zero and wiping out $50,000.00 in bills, they now have to pay $19,700.00 to wipe out $50,000.00 worth of bills. They are therefore paying something like $.40 on a dollar.
If this particular situation were to apply, the couple would not have to pay $19,700.00 all at once. Instead, the case can be filed as a Chapter 13, and the couple can pay the $19,700.00 over a period of five years. In a Chapter 13 the trustee get a 10% commission, so in effect the couple would be paying about $21,7250.00 to wipe out $50,000.00 worth of bills.
If the house in the above examples was owned by just one owner, then the exemption permitted would be $25,150 (1/2 of the $50,300.) As an example, if one owner had a house worth $100,000 and a mortgage payoff of $50,000, you get a 10% deduction, which brings you down to $90,000. You deduct $25,150, which bring you down to $64,850. The mortgage payoff is $50,000. This person is therefore $14,850 over the legal limit, and he/she would have to pay that amount towards unsecured bills because of the large amount of equity in the home
Therefore, the net equity in your home is very important. This number helps to determine whether or not all the unsecured bills can be legally wiped out in your case. That is why we always need to document the value of your home and the amount of your mortgage payoffs.