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Scura, Wigfield, Heyer, Stevens & Cammarota Blog

Evaluating Whether to File A Chapter 7 or Chapter 13 Bankruptcy Proceeding When You Own A Home

[fa icon="clock-o"] April 5, 2019 [fa icon="user"] David E. Sklar [fa icon="folder-open'] Bankruptcy, Chapter 7

house-finance-PDRVUBQOften, individuals who are contemplating bankruptcy have some equity in their residence and are debating whether it will be better to file a chapter 7 or chapter 13 bankruptcy proceeding. This blog will explore what happens when you file a chapter 7 bankruptcy and how you should evaluate your decision making.

REAL PROPERTY EXEMPTION

Upon the filing of bankruptcy, a debtor in a bankruptcy case has the choice as to whether they will choose the exemptions offered by their state of residence or federal bankruptcy exemptions. In New Jersey, the protections in a residence offered by the federal bankruptcy exemptions is significantly larger than those offered by exemptions in a residence offered by the State of New Jersey. Under 11 U.S.C. § 522(d)(1), a debtor can protect up to $23,675.00 of his or her equity interest in real property that is used as a primary residence. In a joint bankruptcy filing, that number can be doubled for a jointly owned marital residence. When analyzing whether there is non-exempt equity in property in a debtor’s residence, a bankruptcy attorney will take the value of the home and deduct any secured liens on the property. Then, an estimated cost of sale is deducted from that remaining value. Whatever equity (if any) is left over would then be applied against the exemption to project, for purposes of the bankruptcy proceeding, as to whether there is any un-exempt equity.

WHAT HAPPENS UPON FILING FOR CHAPTER 7 BANKRUPTCY

Upon the filing of a chapter 7 bankruptcy, a trustee is appointed to administer the case pursuant to 11 U.S.C. § 701. At that point, a debtor relinquishes control over all their property that qualifies as property of the bankruptcy estate and the Trustee is armed with the power to liquidate this property towards satisfaction of creditor claims. This power is limited by any applicable exemptions which arm a debtor with the ability to protect certain property based on certain categories of property, an example of which is the exemption in a residence as discussed above. Generally, if a debtor owns real property, then the Trustee will request a valuation of that property from the debtor. However, the Trustee is not bound by the valuation provided by the debtor and can conduct his or her own investigation into the value of the property. If the Trustee believes that there is value in the Property beyond the allowed exemptions, then the Trustee will seek to liquidate the property for the benefit of creditors. Therefore, it is important to give a thorough and accurate valuation of your residence to your bankruptcy attorney prior to filing your bankruptcy case, so your bankruptcy attorney can give you targeted advise based on the best possible information. If your equity in real property is close to the exemption, then there is a good chance that a trustee will market the property to determine what the market will bear for a sale of the residence. 

WHAT TO DO IF THE TRUSTEE SEEKS TO SELL YOUR RESIDENCE

If a trustee is seeking to sell your residence, examples of solutions that you can pursue to avoid the sale is to convert your case to a chapter 13 bankruptcy case or pay the trustee the non-exempt equity in the residence. Paying the non-exempt equity in the residence often requires negotiation, since it revolves around the debtor and trustee coming to an agreement on the non-exempt equity in the residence. If a debtor seeks to convert to a chapter 13 bankruptcy, then the debtor would have to pay out the non-exempt equity in the residence in full through the chapter 13 plan. However, the Trustee, and any other creditor for that matter, would have the opportunity to object to the conversion of the case. In this scenario, the Trustee can submit his or her own evaluation of the residence and the debtor could be subject to an evidentiary hearing to determine the value of the property for purposes of the bankruptcy case. The debtor would also need to demonstrate to the Court that the chapter 13 bankruptcy case is feasible, in the best interest of the debtor’s creditors and the debtor’s bankruptcy estate. These proceedings can take a significant amount of time, which often leads to high legal fees. Ultimately, in the event of a contested conversion, it is up to the judge’s discretion as to whether to permit the conversion of the case.

HOW TO AVOID THIS

It is always best to evaluate these scenarios prior to entering the case, since trouble-shooting issues becomes more difficult once the case is filed. Even if a potential debtor qualifies for a chapter 7 bankruptcy case, the better chapter of bankruptcy to eliminate the risk of losing a residence is a chapter 13 bankruptcy case. In a chapter 13 bankruptcy case, a debtor does not relinquish control over his or her property to a chapter 7 trustee. A chapter 13 bankruptcy case is also administered by a trustee. However, that trustee does not have the liquidation powers of a chapter 7 trustee and will not force a sale of a debtor’s residence. Instead, the chapter 13 trustee will investigate the case to ensure that the debtor’s creditors are being treated fairly over the course of the chapter 13 plan and that the debtor is complying with the Bankruptcy Code. In sum, a chapter 13 bankruptcy is the best way to eliminate the risk of a forced sale of a debtor’s residence and to give a debtor peace of mind when there is a variable of potential non-exempt equity in a residence.

If you are considering filing for bankruptcy, it is important to contact an experienced New Jersey bankruptcy attorney to guide you through your options and present you with the potential pitfalls. For questions regarding a potential bankruptcy, call the law firm of Scura, Wigfield, Heyer, Stevens & Cammarota, LLP for a free consultation.

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