Keeping a Home When Filing Bankruptcy

One of the questions we’re most often asked is: “can I keep my home if I file for personal bankruptcy?”

The answer to this question depends on your situation.There are 2 types of situations:

  1. The value of the debtor’s home is less than the mortgage balance; and
  2. The value of the home is more than the mortgage balance.

Home Value < Mortgage Balance

In this case, there is no equity. If there is no equity in the home and the debtor files for bankruptcy, the trustee has no interest in the home. It would be pointless for a trustee to sell the home and not even have enough money to pay off the mortgage. In this type of situation, the home is not affected by the bankruptcy. Because the mortgage is a secured debt, the debtor must keep paying the mortgage if she wants to keep the home.

Example 1:

Fair market value of home         $200,000

Mortgage balance                          210,000

Equity:                                            ($10,000)

In this example, there is no equity in this home. If a debtor in this situation filed a bankruptcy, the trustee wouldn’t have any interest in her home. So long as she keeps making her mortgage payments, the bank will be happy with her and she can keep the home.

Home Value > Mortgage Balance + Closing Costs

If the value of the debtor’s home is greater than the sum of: (1) her mortgage balance: and (2) estimated closing costs if she were to sell the home, then there is equity in the home and the trustee has a duty to realize on the equity.

The first option for the trustee is to sell the home, pay off the mortgage and deposit the net proceeds into his trust account for the benefit of the debtor’s creditors. However, the more common option allow the debtor to “buy out” the trustee’s equity in the home by making monthly payments to the trustee’s office.

Example 2:

Fair market value of home         $250,000

Real estate commission                  6,250

Legal fees                                            1,000

Mortgage balance                          210,000

Equity:                                             $  32,750

In this example, there is $32,750 of equity in this home. If the debtor in this situation filed a bankruptcy, the trustee would be required to realize $32,750, as this is an asset of the bankruptcy estate.

The first option is for the trustee to sell the home and deposit into his trust account the net proceeds of $32,750 after paying off the mortgage. These proceeds would be paid to the debtor’s creditors.

The more common approach is for the trustee to reach an agreement with the debtor to allow her to keep the home, on condition that she pays the trustee $32,750. The debtor can make monthly payments towards this $32,750 or perhaps she can borrow money from a relative to pay out the trustee.

This post should not be interpreted as legal advice or a legal opinion. Please consult your Fong and Partners Inc. advisor to review your own particular circumstances.

© Copyright Fong and Partners Inc 2010.

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