Bankruptcy Myth #1: You Will Lose Your House
This is the first in a series of posts about bankruptcy myths – things I hear over and over again from clients that just aren’t true. Most of the time, clients have heard these myths, and believed them, from co-workers, neighbors, relatives, or other sources. Basically, they’ve heard these ideas from everyone under the sun, except for a bankruptcy attorney.
One of the myths I hear most often from clients is that if you file bankruptcy, the Bankruptcy Court or mortgage company will automatically take your house. In the vast majority of cases, especially in this real estate market, this rumor is simply not true. There’s no good source to find hard numbers as to how often the Bankruptcy Court actually ends up selling a debtor’s residence, but most Chapter 7 filers who wish to keep their home and keep making the payments on their mortgage are allowed to do so. I’m only discussing Chapter 7 bankruptcies here, because the Court doesn’t ever take any property from debtors in a Chapter 13 case, which is often filed for the express purpose of saving the debtor’s home from foreclosure.
Now, it is possible to lose your home in a Chapter 7 bankruptcy case, it’s just not very likely in most cases. The reason it’s unlikely is because of the generous homestead exemption (N.C.G.S. sec. 1C-1601(a)(1)) that bankruptcy filers and judgment debtors enjoy in the State of North Carolina. Exemption is just the legal term for the amount of property that you get to keep; what can’t be taken away from you when you either file bankruptcy or have a civil judgment entered against you. In North Carolina, each person gets to keep $35,000.00 equity in his/her residence, and a married couple who owns their house jointly gets $35,000.00 each for a total of $70,000.00 that is protected.
To find the amount of equity in your home, estimate the fair market value of your home and then subtract the amount owed on all of your mortgages – the remaining amount is the equity. Calculating the amount owed on your mortgages is the easy part, but determining fair market value can be tricky, because it’s not necessarily what you paid for your home 6 years ago, or what it was appraised for when you refinanced 3 years ago, and it usually isn’t exactly what the tax value of your home is either. Fair market value is what you could sell your house for, and in this awful real estate market, it would be very difficult, in most cases, to sell your home for $70,000.00 (or even $35,000.00) more than what you owe on it. Some county tax websites (e.g. Wake County) will provide a list of other houses that have sold in your neighborhood recently and tell you what the sales prices were. Where only one spouse is filing and the spouses have no joint unsecured debts (usually credit cards or medical bills), the exemption for home equity is unlimited if the home is owned by both spouses, meaning that the couple could keep the house no matter how much it’s worth.
The point is, don’t put off talking to a bankruptcy attorney because you think you’d lose your home. That outcome is very rare, and it’s not something that happens by surprise because a competent attorney is going to discuss this issue with you in depth before any papers are ever filed. With many attorneys offering free consultations for bankruptcy matters, you have nothing to lose by asking.
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