One of the first questions your bankruptcy attorney will ask you is, "what is the value of your home?" This often throws people off, because home values are not the first thing they are considering in the face of mounting bills and pressure from creditors. It seems like the first questions should be about your amount and types of debt. These are certainly important questions that will need to be discussed, but knowing the value of your home often determines more when considering whether or not to file bankruptcy.
The value of your home is so important because it is likely your most valuable piece of property, and it will need to be protected from your creditors. "Exemptions" under bankruptcy law protect your property from your creditors. However, these exemptions are not unlimited. If, for instance, your own a million dollar home, you cannot file for Chapter 7 bankruptcy, as you would have too much equity in your home. Now, I am sure you are saying, "...if I had a million dollar home, I would not be filing for bankruptcy." Which is true, but this is just an extreme example. An individual can in fact only exempt about $27,000 in equity in their home, a couple only double that amount. So, there will be many situations where the exemptions will be an issue, as this is often about how much equity someone has in a home.
"Equity" is the value of your home, minus what you owe on it. So, first thing that will be important to know is the value of your home (determining what you owe is simple... get a mortgage statement). The value the bankruptcy court will want to know is what the home would actually sell for, not its tax assessment value (they never use this value, as it is rarely accurate). The best value would be a recent purchase price. If you purchased your home last year for $100,000, it is probably still worth $100,000. If you purchased it five years ago, that purchase price may no longer be relevant, depending of the neighborhood. In general, recent purchase price is not useful if your home was purchased awhile back, but it may be a guide as to what it is worth.
The other fool-proof way to value your home is to get an appraisal from a third-party appraiser. The only downside to this method is that an appraisal usually costs several hundred dollars. This will not be necessary in most cases. If you clearly owe more than what your home is worth, you will not need a full appraisal. If your home can be reasonably valued using online comparable values, or recent sales in your neighborhood, you will not likely need to go through the expense.
However, there will be times when getting an appraisal is advisable. In situations where your home value is unclear, or where the exemptions may fully protect your home, or not, depending on the value, it should be strongly considered. An appraisal may save you thousands of dollars in bankruptcy, so a few hundred dollars would be well spent to get one. This will be something to discuss with your bankruptcy attorney.
If the value of your home is too great for the exemptions, all is not lost. You will still be allowed to file a Chapter 13 bankruptcy which lets you keep your home and repay your creditors over a five year period, with court protection. This is the subject of other posts, but even in these cases, providing the court with an accurate value of your home will be necessary.
So, if you are considering speaking to a bankruptcy attorney about your situation, and you own a home, you should first take a little time to consider what your home is worth. Contact us if you would like to schedule a free consultation to discuss your debt and how it relates to your home. We can discuss your situation in more detail and see if bankruptcy is an option for you.