One of the biggest things keeping Michigan homeowners from filing for bankruptcy is the fear that they might lose their house. A Chapter 7 bankruptcy is sometimes the best option for families facing a mountain of debt, but will you have to sell your home during bankruptcy?
This blog post will discuss how a trustee in a Chapter 7 bankruptcy deals with real property, including your primary residence. It will address how the process of filing for bankruptcy affects foreclosure proceedings, and whether you will have to sell your home during bankruptcy.
A Chapter 7 bankruptcy can be a good idea for Michigan residents facing foreclosure, repossession, or unending creditor calls. But it can also significantly affect your household, and your lifestyle. When you file a Chapter 7 bankruptcy, you are agreeing that the bankruptcy trustee may sell all your non-exempt assets and distribute the proceeds among your creditors. The upside of a Chapter 7 bankruptcy is that most of your debts will be discharged and you’ll be able to start again without interest, fees, and late payments bogging you down. But to do that, you will have to sell anything you own that doesn’t fit into a bankruptcy exemption.
There are a number of bankruptcy exemptions that allow you to carve out property and other assets you own from your bankruptcy estate. These assets cannot be sold by the trustee. They are yours to keep even after all your debts are discharged. The homestead exemption is the one that determines whether you will have to sell your home during bankruptcy. This exemption allows you to protect up to a certain amount of equity in your home.
Equity is the net value of your home. It is calculated based on the fair market value of your home (what you could sell it for) at the time you file for bankruptcy minus everything you owe on the property. That includes mortgage and home equity loans. Basically, if you were to sell your home and pay off everything you owe on it, your equity is what would be left at the end of the day.
Michigan bankruptcy law allows you and your spouse to each take several exemptions under either the Michigan bankruptcy exemptions or the federal bankruptcy exemptions. You don’t get to pick and choose. You must do all state or all federal exemptions. Each option includes a homestead exemption, with different upper limits. Which is the best choice for you and your family overall will depend on what you own, and how the exemptions line up with your most valuable assets.
Under the Michigan homestead exemption, you and your spouse together can claim up to $38,225 of equity in your home (or $57,000 for people over age 65 or receiving social security). This applies to one piece of property if you live in a city, village, or town, or up to 40 acres in rural settings. Unlike other exemptions, spouses may not each claim separate homestead exemptions, so the cap is the same for single filers, unmarried co-owners, and spouses who own properties as joint tenants by the entireties filing for bankruptcy together. (Property owned by a husband and a wife as tenants by the entireties may be entirely exempt if only one spouse files for bankruptcy and there are no joint debts.) This exemption only applies to the real property itself (land and building). Other exemptions cover the furniture and personal items that make your house a home.
As of April 1, 2019, the federal homestead exemption applies to up to $25,150 of equity in your primary residence. It can apply to a home or condo, or to personal property used as a residence (like a mobile home or trailer). It does not affect any investment in rental properties. Even though this amount is lower, some families find the federal exemptions cover more of their other assets. If they don’t have as much equity in their home they can use this lower limit to protect their property or other assets instead.
For many Michigan residents, bankruptcy comes in the midst of other financial problems. If you have fallen behind on the payments on your home, that could mean you are facing foreclosure. This is where a Chapter 7 bankruptcy could actually help you save your home.
When you file for bankruptcy in Michigan, it automatically stays any collections efforts. That means any attempts to collect on debts you owe are put on hold until the bankruptcy is over. As long as the sheriff’s sale hasn’t happened before your petition for bankruptcy is filed, your Michigan bankruptcy attorney can make sure that your past-due mortgage payments get included in the Chapter 7 bankruptcy, and you have time to do what it takes to save your home.
If you have more equity in your home than the state or federal homestead exemption covers, then unfortunately, yes, you will have to sell your home during bankruptcy if you file under Chapter 7. You are entitled to keep up to the homestead exemption limit after the sale, but the rest will be put toward paying off your debts.
That’s why some higher-asset homeowners are better off using a Chapter 13 bankruptcy and payment plan to protect their homes and other property. Unlike in Chapter 7, a Chapter 13 bankruptcy doesn’t have a limit on the value of assets you protect. Instead, it sets out a 3-5 year repayment plan for debtors with enough income to make substantial payments toward what they owe. If they complete the plan, the bankruptcy is complete and they can keep their home and other property without having to worry about debt collectors or foreclosures.
At John A. Steinberger & Associates, P.C., we know how important your home can be. We will work with you to weigh the Michigan and federal homestead exemption options and find what is best for you and your family, so you won’t have to sell your home during bankruptcy. We are a full-service bankruptcy law firm in Southeast MI. We serve debtors and families in Southfield, throughout Metro Detroit, and in the surrounding communities. Call us toll-free at (866) 690-2140 or contact us online to schedule a free initial consultation.