Right now, many people are stretched thin financially because of the COVID-19 pandemic. Some have lost jobs, some have lost revenue, and some have had to downsize their businesses. Many have been forced to use credit cards to pay for food, rent, utilities, and the things they need to survive, and now have found that while the stimulus checks are nice, they are not enough to pay all of the creditors who are hounding them.
For a lot of people, filing a Chapter 7 bankruptcy case is exactly what they need to be able to dump unsecured debts such as medical expenses or credit card debt. People who rent their home or don’t have much equity in their home will benefit especially greatly from filing Chapter 7 to get rid of unsecured debts. But what happens to those people who have lived in their homes for a number of years and have built up equity through diligently making timely mortgage payments?
In a Chapter 7, the court appoints a Chapter 7 trustee whose job is to find the bankruptcy debtor’s assets and sell those assets to pay creditors. If a person has a lot of equity in their home and they file Chapter 7, the trustee will likely sell the person’s home and give the proceeds to the creditors.
There are laws set up to protect some of the debtor’s assets from being sold by the trustee—those laws are called exemptions. A bankruptcy debtor gets to “exempt” certain property, meaning the trustee can’t sell it to pay back creditors. In the case of the house, debtors can exempt some of their equity in their house, meaning they will get some of the money that the trustee gets from selling their home. This is called the homestead exemption, and it works like this:
- For individuals, the trustee sells the home and the individual gets $5,000 from the sale of their home. They are “exempting” $5,000.
- Married couples can exempt $7,500 of equity in their home.
- Joint owners with at least one minor child can exempt $25,000.
- An individual who is over 62 can exempt $12,500.
- Married couples where one owner is over 62 can exempt $20,000.
- Married couples where both owners are over 62 can exempt $25,000.
If you want to keep your house and you have a lot of equity in it, then Chapter 7 is NOT for you. You will need to file Chapter 13.
Chapter 13 bankruptcy is a good way for debtors to get some breathing room to reorganize their debt and hold on to their assets. When you file a Chapter 13, you usually keep your house. You put your house payments and the arrearages into a bankruptcy plan, under which you will pay your creditors back over five years.