What is Equity in Bankruptcy?

"Equity" has many meanings in law and business. It is an important issue in bankruptcy law, so it is worth discussion. The most general meaning of equity in a legal context relates to legal doctrines and usage of law to promote fairness over rigid adherence to the rules. The law of equity seeks to set things straight, and put litigants back to where they started before the legal problem began.

This is a very important usage of the law, but it rarely applies in bankruptcy law. When your bankruptcy lawyer speaks of equity, he or she is almost always referring to your home or real estate. Equity in real estate is a very important matter in bankruptcy law.

The Merriam-Webster dictionary defines equity (among other definitions) as, "the money value of a property or an interest in a property in excess of claims or liens against it." That sounds more daunting than it really is. Equity for bankruptcy purposes is simply the value of your property minus what you owe, including mortgages, tax liens, and lawsuits.

So, let's say your home is worth $100,000.00. You have a mortgage for $60,000.00, a home equity loan of $15,000.00, and a secured tax lien of $5,000.00. That means you have $20,000.00 in equity. (100-60-15-5=20) Equity is a fancy sounding legal term, but it is really that simple. It is just the value of your home, minus what is owed on it (to the mortgage company, taxing agencies, etc.)

You'll sometimes hear of a home being "under water". This just means you have negative equity, or you owe more than the home is worth. This is pretty frequently the case when a home is first purchased and payments are going primarily towards interest. It also occurs when housing values crash. Individuals with multiple liens, including home equity loans, often face negative equity, as well. This is not really a problem in bankruptcy, as should become clear below.

Positive equity in your home is so important to bankruptcy law because the exemptions used to protect that equity is usually limited. The Federal Homestead Exemption, which is typically used in Pennsylvania to protect equity in your primary residence, is currently $23,675.00, per spouse (the number is routinely adjusted). Equity in a jointly owned marital home can not exceed $47,350.00. If it does, you will need to repay unsecured creditors dollar-for-dollar for unexempt equity. This could result in thousands of dollars of repayments.

Without going into too much detail about these circumstances, you can probably see why equity is so important to determine. The amount of your liens (mortgage, home equity, etc.) are pretty easy to prove. You just get a statement from the mortgage company or the taxing body. However, the value of your home can sometimes be a subjective task. If you recently purchased your home, the Court will often use that purchase price. The Court will also let you estimate based on other homes in your neighborhood and for what they have recently sold.

If the value is less clear, and it will potentially determine how much money you need to repay creditors, it may become necessary to get an appraisal. Real estate appraisals will usually cost several hundred dollars, but it is money well spent, as it will prevent your case from objections and unnecessary scrutiny. They should only be necessary in situations where the equity is not clear. It is the only sure-fire way to prove the value of your home to the Court.

So, when you speak with your bankruptcy attorney, and equity is the first major issue he or she asks about, it should now be clear why. If you are having credit issues and you are having trouble determining equity in your home, contact us to set up a free consultation.