Not that long ago, the values of many homes here in California Bay Area have dropped dramatically and the real estate bubble has burst.
Or has it?
The real estate market has been bouncing back in many parts of the Bay Area. A fairly typical situation was described by my potential client last week. She purchased her home in San Jose in 2003 for about $560,000; the value reached $825,000 in 2006; then it dropped by half, to a little over $400,000 in 2009; and it has been going up like crazy since last year, reaching approximately $680,000 per latest home valuation calculators.
Do rising home values matter if you are thinking about filing bankruptcy? Yes, they do, whether or not you own real estate.
If you do own real estate, the difference is particularly stark. Bankruptcy court considers value of all of the person’s assets and overall financial situation to see if creditors are entitled to any pay-out. If a home has no equity, it’s generally not treated as an asset of value and does not entitle your creditors to any payments. If a home has limited amount of equity, then we should be able to protect it with a homestead exemption when the bankruptcy case is filed. If a home has a lot of equity that cannot be protected, then you either risk losing this home to creditors if you file Chapter 7, or you have to make some payments to creditors through a court-approved plan in a Chapter 13 case if you want to protect the home from creditors’ reach.
At least here in California, the homestead exemption is quote modest. Also, if a home has some equity and we use the homestead exemption to protect it, our available exemptions (and bankruptcy protection) for all other types of assets are much more limited.
It doesn’t end there. If the value of the home is low enough, we may be able to strip and void second mortgages and home equity liens and judgment liens as being worthless. However, if the value of the home has gone up to the point that the value exceeds (even slightly) the balance of the first mortgage loan, then we likely would not be able to get rid of the junior liens on the property.
People sometimes think that stripping junior mortgages and judgment liens in bankruptcy is a new phenomenon, especially since many homeowners have been able to do it in the last few years. It’s not new – it’s just that previously, when the home values were high and many homes had equity, almost no one qualified to clear the junior liens. If the value of your home goes up, it’s great in the long run, of course, and may mean you have a better nest egg – but it may also mean that you may not be able to clear the junior liens if you wait to file bankruptcy until after the value has gone up significantly.
If you don’t own real estate, rising home values may also affect you: you may be having to pay more for rent, and may have less funds available for all other living expenses.
If you are having financial difficulties and are thinking about filing bankruptcy, don’t delay scheduling an appointment with a bankruptcy attorney to find out about your options. Your bankruptcy options may be more limited if you wait to file when the home values are going up.