Home Appraisals and Bankruptcy

Individuals considering bankruptcy will sometimes need to obtain a formal appraisal of their home's value. Unfortunately, this is an added expense, but in most cases it is the wise and prudent thing to do.

So, why are home values so important in bankruptcy? In many cases, it is the most important variable in a bankruptcy petition. The value is so important because equity in a home can be exempted (or protected) in bankruptcy. Equity is the value of your home, minus what is owed on it. If your home is worth $100,000, and you have an $80,000 mortgage, your equity is $20,000.

This equity can be protected, but only to a certain degree. The Federal bankruptcy exemptions allow for $22,975.00 for the "Homestead" exemption. This doubles to $45,950.00 for married homeowners who file jointly. This equity in your home, and the exemption to protect it, is very important because if the equity in your home exceeds the exemption available to protect it, you must pay back unsecured (ie credit cards, medical bills, payday loans, etc.) creditors dollar-for-dollar the amount that is not exempt.

It's worth making another example to clarify. If your home is worth $100,000, but your mortgage is only $60,000, you have $40,000 in equity. $22,975 of this equity can be protected, leaving $17,025 as not exempt. This $17,025 that is not exempt must be paid back to unsecured creditors, in full. If you owed $10,000 to unsecured creditors, the full $10,000 would need to be paid, likely through a Chapter 13 bankruptcy.

Home values are so important in bankruptcy because they determine equity in the home, and differences in equity can obviously result in vastly different scenarios in bankruptcy. Bankruptcy filers with little or no equity will normally not need to hire an appraiser. Or, if the home was very recently purchased, or the value of similar comparable homes in the neighborhood is firmly established (such as in a housing plan), an appraisal will not likely be needed.

But, where a wide range of values could be reflected, it is worth having an independent, third-party appraiser value the home. (NOTE: An independent, third-party appraiser, as opposed to a friend or family member is important, as the chances of the value being challenged in Court will greatly decrease if the appraiser is a disinterested party). An appraisal may cost in the $300 to $400 dollar range, but this cost will be saved many times over if a value in your home is established that lessens the amount you pay to creditors.  When equity is fully protected, and income is below the means test threshold, clients can normally file a Chapter 7 bankruptcy and potentially save tens-of-thousands of dollars.

The appraisal itself is a quick process where that appraiser visits and inspects your home, and then does some research to compare it to other homes in your neighborhood. Once again, the minor hassle will normally be worth it financially many times over.

One last point, county tax assessment values CANNOT be used to establish home value, as the Bankruptcy Court does not allow these values in the calculation. Tax assessment values often differ greatly from actual real estate values, hence the Court's position on the matter.

If you are considering filing bankruptcy, contact us to set up a free consultation in person or over the phone. I will be happy to sit down and start the process of valuing your home, and more importantly, protecting it through bankruptcy.