How Much Equity Can You Have in a Home and Still File For Bankruptcy in Pennsylvania?
A common fear people have when discussing the idea of filing for bankruptcy is losing their property, especially their house. Equity is the key factor when determining how your home is handled in bankruptcy. Your equity is the proceeds you would realize if you sold your home after all liens, fees, and other costs were paid. For example, imagine you own a home worth $200,000 with a $150,000 mortgage balance. Assuming closing costs are approximately 10% of the “selling price,” you have $30,000 of equity in your home—the value of your home, $200,000, minus the mortgage and closing costs of $170,000.
But how much equity is “too much?” The answer depends on a number of factors, including the bankruptcy chapter, your marital status, the type of debt, and what kind of bankruptcy exemptions you choose. Below, we address how each of these factors impacts a bankruptcy case. However, because there is no one simple answer, our experienced Philadelphia bankruptcy lawyers will have to carefully evaluate your unique situation.
Filing for bankruptcy can be intimidating, especially if you are worried about losing your home. At Young, Marr, Mallis & Associates, our lawyers and staff want to make the process as painless as possible. We also want you to understand the process. Call (215) 701-6519 to get started.
Understanding Bankruptcy Exemptions and Home Equity in Pennsylvania
When you file for bankruptcy in Pennsylvania, all your property, including your home, becomes part of the bankruptcy estate. Legally, everything in the bankruptcy estate could be liquidated to pay your creditors. Fortunately, there are provisions under federal and state law that allow you to keep a significant portion, if not all, of your property. These protections are known as exemptions. In some states, you must use the state exemptions. However, in Pennsylvania, debtors have the option of picking either the federal or state exemptions.
The Federal Homestead Exemption
Under the federal homestead exemption, 11 U.S.C. § 522 (d) (1), a bankruptcy debtor is entitled to protect $25,150 of equity in their home. If filing a joint case as a married couple, this exemption doubles. Therefore, a married couple in Pennsylvania could file for bankruptcy with $50,300 of equity in their home and not impact their ability to discharge debt.
The Pennsylvania Homestead Exemption
The Pennsylvania exemptions do not include a homestead exemption. However, married couples could own property as tenants by the entity (TBE). Under this classification, both individuals own 100% of the property. This distinction is important because of the rights creditors have in Pennsylvania.
When creditors sue to collect a debt, they are entitled to a judgment lien on any real property a debtor owns, including their home. However, if the debt is only in one spouse’s name, a judgment lien is not entered against a TBE property. This protection extends to bankruptcy.
To illustrate, imagine a couple filing for bankruptcy with a $200,000 mortgage-free home. If they share credit card debt or personal loans, they could lose their home if they file for bankruptcy. However, if one spouse owes the credit card debt and the other owes the personal loan, they could take advantage of Pennsylvania’s TBE exemption to protect their home. It is important to note that Pennsylvania’s exemptions are not as generous as the federal ones, so there could still be other issues depending on the couple’s other property. Our Pennsylvania bankruptcy attorneys will have to thoroughly review your assets to determine if the Pennsylvania exemptions are the best option.
How Equity in a Home Can Impact a Pennsylvania Bankruptcy Case
It is important to understand how your home’s equity impacts a bankruptcy case. If you are filing Chapter 13 to stop a foreclosure and have no other debt, then the amount of equity in your home will not influence your bankruptcy case. However, if you have significant equity and want to file Chapter 7 to discharge credit card or medical debt, the equity could be a problem.
Chapter 7 Bankruptcy
As stated above, when you file for bankruptcy, your home becomes part of the bankruptcy estate. A chapter 7 trustee is charged with taking possession of non-exempt property and selling it to pay a filer’s debts. If your home has non-exempt equity, it could be sold. Our Philadelphia Chapter 7 lawyers will carefully examine the equity in your home to determine if filing a Chapter 7 case is feasible.
Chapter 13 Bankruptcy
Home equity has a different effect on Chapter 13 cases. You could have a significant amount of equity and still file Chapter 13. The equity in your home will affect how much you will have to pay to creditors under your bankruptcy plan.
For example, imagine your home has $40,000 of equity. As a single filer, you exempt $25,150, leaving $14,850 of non-exempt equity. You filed your case because you have $70,000 of credit card debt and medical bills. Unfortunately, because of the equity in your home, you were prohibited from filing a Chapter 7 case. Because of the non-exempt equity in your home, you will have to pay $14,850 to your unsecured creditors through your bankruptcy plan. The remaining $55,150 of debt is dischargeable.
Some people file Chapter 13 because their home is in foreclosure or there is a sheriff’s sale scheduled. If your only debt is your mortgage, then the amount of equity in your home is not a factor.
The above examples are simplified and do not consider other factors, such as the means test. Our Philadelphia Chapter 13 bankruptcy lawyers will have to review your particular circumstances to determine how your equity impacts your case.
Our Pennsylvania Bankruptcy Lawyers Provide Our Clients With Professional and Sympathetic Representation
Anyone considering filing for bankruptcy has questions and concerns. Young, Marr, Mallis & Associates is here to answer those questions. Our knowledgeable Pennsylvania bankruptcy lawyers have filed thousands of cases and have the experience to handle the most challenging cases. You should not assume bankruptcy is not an option because you have equity in your home. Call (215) 701-6519 to discuss your options.