Dear Bankruptcy Adviser, I have equity in my home, and I was OK making payments. But I was in the construction business and could not keep up with what I owed. Now the bank has charged off several loans and is getting ready to sue me. All I have left is my personal home. With creditors closing in, what can I do? -- Michael
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Dear Michael, Let's hope you can protect all your home equity and still file for Chapter 7 bankruptcy protection. This type of bankruptcy allows you to wipe out your debt and keep your property.
It is very important to consult with an attorney prior to filing bankruptcy whenever you have equity in your home. You need to be certain prior to filing that you do not have more than you can protect.
In the event you do have too much equity, you need to know your options.
- You could file a Chapter 13 bankruptcy, which is commonly known as a reorganization bankruptcy. It calls for a repayment of some or all of your debt over a period of up to five years. In some cases, you may have to pay back only a portion of what you owe. Let's say you want to file bankruptcy and have $200,000 of equity in your primary residence, and your state's bankruptcy exemptions allow you to protect only $150,000 worth. In Chapter 13, you would have to pay back that $50,000 you could not otherwise protect.
- You could allow your creditors to sue you and place a lien against the home. Crazy but true: In some cases, this might be your best option for holding on to your home and equity but only if your state prohibits creditors from selling the property. You would need to confirm that in your state, a creditor cannot force the sale of your home after securing a lien. While the lien against your home would continue to grow at a judicially set interest rate until it is paid, you would be able to stay in the house. It's a strategy that has some risks, so talk with an attorney before considering this approach.
- Refinance the property. In the past, some people would refinance their home to pay off creditors. This option is less and less available in today's lending environment. Lenders are unwilling to lend to most people with less-than-perfect credit. So, tapping into your equity probably is not an option.
Here's one thing you don't want to do: accept any advice that you put the property into a trust or transfer it out of your name altogether. This is no solution. If you're eventually sued for what you owe, the creditor would be able to unwind that property transfer by claiming you intentionally tried to hinder, delay or defraud the creditor from its lawful rights to collect. You cannot simply transfer the property out of your name to avoid a creditor's claims.
Some people will have a friend place a lien against the property then file bankruptcy. The lien conveniently uses up the amount of unprotected home equity. This option rarely, if ever, works. The court-appointed person assigned to your bankruptcy case, called a trustee, would want to know what you did with the money and when the lien was placed on the property. You would need a very experienced and competent bankruptcy attorney to show you how to execute this type of action, if it's at all possible.