Filing Bankruptcy And Protecting Your Home

Homeowners very often wind up filing for bankruptcy. Before filing, homeowners wonder whether or not they will be able to keep their house through the bankruptcy process. For most homeowners, there is not sufficient equity in the property which would cause them to lose the property. In other words, the property has no administrative value for a chapter 7 trustee to attempt to sell the property and pay creditors a pro rata share.  Now each state is different in terms of how much equity you can have in real estate and still keep that property free and clear when going through the bankruptcy process. In the state of Illinois, you are entitled to a $15,000 exemption in your homestead, real estate property. If you are filing a joint bankruptcy, husband and wife, then the two of you can protect up to $30,000 worth of equity in that real estate and still get a fresh start.

In reality, you can probably have a significant amount more than your exemption amount and still file a chapter 7 bankruptcy. This is due to the fact that the chapter 7 trustee, in order to administer your property for the benefit of creditors, must realize a significant non-exempt portion to make it worth his while. For example, if you have $25,000 worth of equity in your real estate, and you’re worried about the trustee selling the property, you can put your fears to rest. The trustee has to stand in your shoes when he or she sells the property. Thus, the trustee is going to have a 5% to 6% brokers commission, title expenses, transfer fees, attorneys fees, and other costs associated with selling your property. By the time all of these costs and expenses are factored in, there would still have to be significant equity for the trustee to follow through. The reason for this is simple. When a trustee administers an asset for the benefit of creditors, he has to provide a detailed report to the bankruptcy court and must ask for approval of the sale. If the judge realizes that the only person benefiting from the sale is the trustee, the judge may decline to grant the trustee’s request. In other words, if the trustee is benefiting financially, yet the creditors are receiving next to nothing on their claims, then the court might determine that the administration of the asset is too burdensome and of too little value to the creditors.

If you feel that your property may exceed your exemption amount, then I would recommend you get a free, market evaluation from a local realtor. Most realtors will provide it to you free of charge and it will itemize the approximate value of your property based upon what other properties in your neighborhood have sold for or are currently being listed for. If you are unable to obtain this report, you may want to invest in an actual appraisal to determine the fair market value of your property. Once you have this information in hand, you can make an educated decision as to whether or not filing chapter 7 bankruptcy  is a good idea. You may decide that the risk of losing your property exceeds the benefit of getting out of debt.

Please keep in mind that you can always file a chapter 7 bankruptcy  and buy out the trustee’s interest in the property. I have seen this done on many occasions with real estate and with other property that the debtor may possess at the time of filing. By way of example, if there is approximately $15,000 worth of non-exempt property after the cost of a potential sale, the trustee will entertain offers from the debtor to buy out his interest. In a case where there is $15,000 worth of available equity, I would suggest a offer of approximately $8000-$9000. The trustee would rather have cash in hand instead of listing the property and going through a formal sale. The benefits are two-fold. First, the trustee does not have to go through the burdensome task of listing the property, selling the property, and paying the fees associated with that. Secondly, selling a property at fair market value will require time. Some properties will stay on the market for a very long period of time before sale, depending upon the condition of the property. By buying out the trustee’s interest, the trustee is given cash in hand in quick order. The trustee can then just set out the claims bar date, await claims to arrive, and pay creditors their share out of that cash settlement.

Your attorney will be able to advise you as to whether or not your property is likely to be taken by the trustee and sold. Your attorney will be able to advise you as to the climate of the marketplace as well as the climate of the trustees in your local area. In Cook County, Illinois there are over 50 chapter 7 bankruptcy trustees at any one time. I can only think of a small handful that would go out of their way to dislodge a homeowner from their home for very little non-exempt equity. The majority of trustees in this area are good, honest people.  They are only going to make an issue of non-exempt property provided it is substantial. When I say substantial, I mean the proceeds, after all the expenses are paid, and after the debtor is given his exemption, will provide at least a 10% dividend to the unsecured creditors. Otherwise, a chapter 7 trustee is not going to go through the exercise if the net result to unsecured creditors is going to be negligable.   If you are worried about your property and you need to file for bankruptcy, make your attorney aware of your concern. In most cases, your attorney will likely tell you that you have nothing to worry about whatsoever. It is only in extreme cases, were a homeowner struggling financially has significant equity in the property. For those individuals, chapter 13 bankruptcy  may be a better option. Please consult with an experienced, bankruptcy attorney in your local area before making any rash decisions.

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