Home Equity

• Home equity is determined by subtracting the total amount of liens and mortgages from the total value of your home. During the recent financial crises, many homeowners were in the unfortunate situation of losing equity in their homes because the value of the homes themselves dropped due to forces beyond their control. Sadly, the downturn in the economy also meant an increase in the number of bankruptcies.
  
  

Bankruptcy Law State and Federal

• It is important to remember that while bankruptcy is strictly federal law as stated in the U.S. Constitution, bankruptcy exemptions are state law. There is a federal set of bankruptcy exemptions but not every state uses them. Some states use their own set of exemptions.
  
  

Exemptions

• States vary in their exemptions. For example, in Florida and Texas all of the home equity in your home might be protected. In New York State $50,000 worth of home equity might be protected. Some debtors actually move about the country in order to seek a more favorable venue to file bankruptcy. If your home is worth $200,000 you owe creditors $500,000 and you have home equity of $60,000 in New York, you would not get to keep your home in a Chapter 7, it would still be sold but you would get $50,000 to use to buy a smaller house or rent an apartment.
  
  

Changes Under the BAPCPA

• The recent update to the bankruptcy code known as the Bankruptcy Abuse Prevention and Consumer Protection Act sought to curtail debtors moving about to seek more bankruptcy exemptions. It limits the homestead exemption to $136,875 for homes bought within 1,215 days and in some instances eliminates the homestead exemption entirely.
  
  

Chapter 13 vs. Chapter 7

• Chapter 13 is known as wage earners' bankruptcy. Not everyone is qualified to file for bankruptcy under Chapter 13. In a Chapter 7 bankruptcy, creditors are paid back from the assets of a debtor and the remaining debts are discharged shortly thereafter. In a Chapter 13 bankruptcy, creditors are paid back from future earnings in accordance with a court approved plan. A debtor is able to keep more assets in a Chapter 13 and may be able to keep his or her home so a debtor might consider a Chapter 13 if he has a lot of home equity.
  
  

Considerations

• Filing for bankruptcy is a serious matter that should usually be entered into with the consultation of a lawyer. This is especially true when a debtor has certain property that he or she really wants to keep like equity in a home.