Should I File for Bankruptcy If I Have Equity in My Home?

Chapter 7 bankruptcy, commonly known as “liquidation bankruptcy,” is a legal process that allows individuals to discharge most of their unsecured debts, such as credit card debt, medical bills, personal loans, and other past-due payments. This type of bankruptcy is designed for people who have limited income and cannot repay their debts. Filing for Chapter 7 can provide a fresh financial start, but it also involves the potential liquidation of non-exempt assets to repay creditors.

To qualify for Chapter 7 bankruptcy, a person must pass the means test, which compares their income to the median income for a household of similar size in their state. If the individual’s income is below the median, they automatically qualify for Chapter 7. If it exceeds the median, the means test will assess their disposable income after deducting allowable expenses. If the disposable income is insufficient to pay off debts, they may still qualify.

What Is Home Equity?

Home equity represents the difference between the current market value of your home and the outstanding balance on your mortgage monthly payments. It’s essentially the portion of your property that you truly own, as opposed to what is owed to the lender. For example, if your home is worth $300,000 and you owe $200,000 on your mortgage payments, you have $100,000 in home equity.

How to Calculate Home Equity

To calculate your home equity, follow these steps:

• Determine your home’s current market value: This can be done by reviewing recent sales of similar homes in your area, getting a professional appraisal, or using online valuation tools.
• Subtract the outstanding mortgage balance: Contact your mortgage lender or check your most recent mortgage statement to find out how much you still owe.
• Subtract any other liens: If there are additional liens, such as a second mortgage or home equity line of credit (HELOC), these should be subtracted from the market value.

Home Equity and Chapter 7 Bankruptcy Exemptions

Home equity plays a key role in filing bankruptcy Chapter 7. The Chapter 7 bankruptcy home equity limit you can have depends on the exemptions available to you. Exemptions are legal protections that allow you to keep certain property from being seized and sold by the bankruptcy trustee to pay off your debts.

If your substantial equity exceeds the exempted amount, the trustee may choose to sell your home to pay off secured or unsecured creditors, although they must first pay you the exempted amount. In this case, you may risk losing your home, but the laws vary from one state to another. 

State-Specific Exemption Laws

Bankruptcy laws on exemption vary widely from state to state. This means the amount of home equity you can protect under Chapter 7 bankruptcy differs depending on where you live. Some states have generous exemptions that protect a significant equity amount, while others have more limited protections in case of bankruptcy filing.

Federal vs. State Exemptions

In some states, debtors can choose between federal homestead exemption and state-specific exemptions, depending on which offers better asset protection. It’s important to note that Illinois does not allow you to choose between state and federal exemptions, meaning you must use the state’s exemptions when filing for Chapter 7 bankruptcy in Illinois. 

This limitation underscores the importance of careful planning and guidance from an experienced bankruptcy attorney in Chicago to maximize the protection of your assets under Illinois law (and not federal laws) for bankruptcy proceedings.

Illinois Homestead Exemption Limits

The homestead exemption protects a certain amount of equity in your home from being seized by the bankruptcy trustee. In Illinois, the state’s homestead exemption allows you to protect up to $15,000 in home equity if you are a single homeowner and up to $30,000 if you are a married couple filing jointly. 

This means that if your home equity is below these amounts, it’s fully protected when filing for bankruptcy Chapter 7, and the trustee cannot force the sale of your home to pay creditors. However, if your equity exceeds these limits, the excess amount could be at risk.

Strategies a Chicago Bankruptcy Lawyer Will Use for Protecting Home Equity in Bankruptcy

A skilled bankruptcy lawyer in Chicago can employ several strategies to help protect your equity and mitigate the risk of losing your home if you are considering Chapter 7 bankruptcy to deal with secured or unsecured debt:

• Fair Market Value of Your Home: A bankruptcy exemption lawyer can help ensure that your home is accurately valued, potentially reducing the amount of equity that is considered in the bankruptcy process.
• Exemption Maximization: If solutions such as debt relief, loan modification, or a repayment plan are not feasible, and bankruptcy proceeding is required, your lawyer will help you maximize the bankruptcy exemptions available to you under the law.
• Timing the Filing: If your home equity is close to the exemption limit, your lawyer may recommend waiting until you have paid down your mortgage further or until market conditions change, reducing your equity.
• Conversion to Chapter 13: If it appears that your home equity exceeds the allowable exemption, your lawyer may advise converting your case to a Chapter 13 bankruptcy. Chapter 13 allows you to keep your home while repaying creditors over time, rather than liquidating assets.
• Negotiating with the Trustee: In some cases, your lawyer can negotiate with the trustee to allow you to keep your home in exchange for paying the non-exempt equity amount over time.
• Using Wildcard Exemptions: If available, your lawyer may also utilize wildcard exemptions, which can be applied to any property, including home equity, to further protect your assets.

How Much Equity Can I Have in My Home and Still File Chapter 7? Schedule a Free Consultation 

At DebtPros, we understand the stress and uncertainty of overwhelming debt. Our experienced Chicago bankruptcy attorneys are here to help you take control of your financial future. If you have concerns related to home equity and Chapter 7 bankruptcy, we can guide you through the legal process to find the most effective solution. 
Reach out to a dedicated Chicago bankruptcy lawyer at DebtPros today, and let us help you achieve the fresh start you deserve. Call 24/7 at (312) 313-3643 or contact us online to schedule your free consultation.