How Much Equity Is Too Much For Chapter 7 Bankruptcy?

Most clients who call seeking chapter 7 bankruptcy relief do not have significant equity in their real estate. In fact, most clients who call today have no equity in their real estate. Since the real estate market plummeted several years ago, most clients are in a situation where they owe more on the property than what it’s worth. For this reason, chapter 7 is readily available since there is no equity in the real estate property.

Equity Exists

However, there are some people that do have equity in real estate and it does become an issue as to whether or not they will be able to complete a chapter 7 bankruptcy case without giving up any interest in the property. In the state of Illinois, the debtor’s entitled to a $15,000 exemption in real estate. In a joint filing, husband and wife, the couple can protect up to $30,000 worth of equity in real estate. Technically, the couple can have more than $30,000 worth of equity and still make it through chapter 7 unscathed. This is because the chapter 7 trustee has to look at what it would take to sell the property and provide a dividend to the unsecured creditors. The trustee must factor in the cost of sale, the title expenses, attorneys’ fees, and all other expenses associated with such a transfer. It is only at the end of the transfer, after all fees and expenses are paid put and after the debtor is given their exemption amount that the trustee can look to see if he has anything left over to administer to creditors. If this number is small, the trustee will not bother to administer the asset because it is simply too burdensome.

Obtain The Market Value

One of the things we do in my office is counsel the clients to obtain a fair market valuation. This can usually be done for free through a realtor or in some cases they have to pay a small fee to get a CMA, which stands for comparative market analysis. Once we have that figure and have it documented, we are in a greater position to offer advice to the client as to whether or not chapter 7 is going to be successful. We also have evidence that we can show the chapter 7 panel trustee so that the trustee doesn’t continue to investigate the property with the same vigor as is if there was no comparative market analysis.

Roll The Dice

There are some cases where there is equity and the debtor sometimes wants to roll the dice to see if they can make it through the chapter 7 without the trustee seeking an interest. In those situations, we have the client sign a potential asset acknowledge form. By signing this form, the debtor is put on notice that they may have to pay something to the trustee in order to buy out his interest in the real estate. This file can be done from exempt funds such as retirement accounts or from help from family or friends. In my experience of over 23 years, there have only been a handful of situations where the trustee sought interest in real estate where we did not think he would. In some of those cases, the trustee wound up abandoning his interest when he found it too difficult to sell.

In summary, the Illinois statutes govern how much equity you can have in real estate and still file a chapter 7 without the trustee seeking an interest. Oftentimes, it’s a close call. That is what makes my job difficult at times. I have to make sure the client is aware that there is a potential risk that the trustee may seek an interest in real estate. It is then up to our legal ability and negotiating ability to convince the chapter 7 trustee to not follow through with administering the property. For more information on equity and property as it relates to your potential bankruptcy filing, you can call the office at 847-520-8100. We work with a number of realtors and evaluators who can help guide you through the process to determine whether or not your property is subject to a taking by chapter 7 bankruptcy trustee.

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