If you own a house and file for bankruptcy, whether you will be able to keep the house depends on several factors. One way to understand how this works is to understand what is supposed to happen in a bankruptcy case.
When you file for bankruptcy, the idea is that all of your possessions will be sold and the money will be used to pay something to your creditors. However, there are things you are allowed to keep even though you file for bankruptcy. These are called exemptions. You can keep your clothing and household goods; your retirement benefits; your car if it is not too valuable; and many other assets.
Bankruptcy and your home
Under New York law, there is an exemption for a home. The amount varies according to where you live, and in the New York City area it is $150,000 per person. This is up to $150,000 in equity, meaning if the value of the house minus the balance due on all of the mortgages is less than $150,000, you can keep your house. Since it is “per person”, if a husband and wife file together, they can keep up to $300,000 in equity. And, if you own the house with other people, the $150,000 applies only to your own share of the equity. Thus if you have a house with $450,000 in equity, but own it with two other people, your share of the equity is $150,000 and you can exempt your entire share. In order to claim this exemption, though, the house has to be your residence.
These days, in many situations, the balance due on the mortgages is more than the house is worth. This situation is what is meant when a house is referred to as being “under water.” You will always be able to keep your house through the bankruptcy in this situation, not because of the exemption, but because there is no equity in the house and thus no value that could be realized for the creditors.
More than one home?
Sometimes people have more than one house because they bought another as an investment. If the second house is “under water” you will be able to keep that one as well because, again, there is no value in it. However, this will only happen if you are not expending any of your own money to support the second house. Thus, if you receive rental income from the house and are able to support the second house with the rent, you will be able to keep it if it is under water. However, if you have to take money from your own budget, the Bankruptcy Court will not approve of you keeping the second house because you are taking money you could be paying to your creditors to support a house you do not need.
Paying the bills
It also goes without saying that you have to maintain any mortgages on houses you keep through a bankruptcy, including any arrears. If you are behind on the mortgages, the Bankruptcy Court will not take the houses away from you if they are exempt or under water, but the mortgage company will be able to foreclose once the bankruptcy is over. Where a house has more equity than the allowed exemption of $150,000 per person, or a second house has any equity, the house will be sold. If it is your residence, you will be paid the first $150,000, and the rest will be used to pay something to your creditors. In actual practice, there has to be something more than $150,000 in equity for the house to be sold, or there has to be some decent amount of equity in a second house for it to be sold, because there are expenses that go along with selling a house and it would not make sense to sell a house if there would be nothing left.
In all cases concerning a house, your attorney should be able to advise you on the likely outcome if you file for bankruptcy. You may need to have a professional appraisal done to be sure of the value of the house to know what is going to happen, but if the value is known to a reasonable certainty, your attorney should be able to tell you exactly what is going to happen during your case.
Allan Bloomfield practices bankruptcy law in Forest Hills, Queens. Contact Allan today for a free consultation.