How Much Equity Can a Debtor Have in Their Home and Still File for Chapter 7 Bankruptcy?

How Much Home Equity Can a Debtor Exempt in California Bankruptcy?

As California bankruptcy attorneys, we are often asked how much equity a debtor can have in their home and still file for Chapter 7 bankruptcy? The answer is simple: anyone can file for bankruptcy, but it may not be wise to if the debtor’s exemptions do not cover their assets, also known as having exposed assets. These assets are exposed because they the Chapter 7 Trustee can sell your house to derive a benefit for creditors.

The California homestead exemption starting 2021 is as high as $600,000 or as low as $300,000, depending on the median home price in the debtor’s county. To determine how much equity a debtor can have in their house while obtaining a Chapter 7 discharge without paying anything to the Chapter 7 trustee, follow these steps:

Determine the fair market value of the property. Note that properties in bankruptcy generally sell for about 95% to 98% of the fair market value in an ordinary market transaction, so there isn’t much of a discount to be applied.
Subtract the costs of sale. While these may be around 7% in an ordinary market transaction, the cost may be closer to 8 to 10% in a bankruptcy sale given the fees of the trustee’s attorney.
Subtract any debt on the property, such as the first mortgage, second mortgage (if any), judgments, unpaid taxes, and any other liens. Note that trustees sometimes try to make a deal with junior lienholders by taking a carve-out of what they are owed to sell otherwise underwater properties, so there is no guarantee that this calculation will result in the debtor walking out of bankruptcy without ramifications.
Subtract the homestead exemption in California.

If the result is a positive figure, this is the exposed equity that the debtor may need to pay to the trustee to keep their home in a Chapter 7. If the result is negative, the odds are in favor of the debtor that the bankruptcy will be a “no asset” bankruptcy. Even further, debtors may be able to take advantage of the laws on transferring except property without being subject to fraudulent transfer laws.

It is important to carefully consider all options in consultation with an experienced bankruptcy attorney who is skilled in real estate law to obtain the optimal result.