You’re broke and your creditors are banging on the door. You need to take action. If you declare Chapter 7 bankruptcy, you know a trustee will take most of your assets and sell them to pay your creditors. Will you still have a place to live?
The answer: Maybe.
Here’s how it works
When you declare Chapter 7 bankruptcy, the court appoints a trustee who tallies up all your debts and assets. The trustee seizes all cash, accounts and anything that can be sold to pay off your debt.
One of your assets is your house. There is a formula to decide whether to sell your house.
The first thing the trustee looks at is the fair market value of your house. To determine this, you can offer an appraisal you had completed before you declared bankruptcy. Otherwise, the trustee will hire an appraiser to provide the fair market value.
Then the trustee will look at the remainder of your mortgage. The trustee will subtract that from the fair market value of the house.
The trustee will also subtract anticipated closing costs and fees associated with selling your home. These are set at 10 percent of the fair market value.
Last, the trustee will subtract an exemption of $23,675, or $47,350 if you are married and filing jointly.
Therefore, if the market value of your house minus your mortgage, closing costs of 10 percent and your exemption results in a positive number, the trustee could sell your home to pay off your debts. If the equation results in a negative number, then you get to keep your house.
There are calculations that go into your other possessions as well. If you have a vehicle, its market value will be weighed against the amount owed. For example, if you have a car that can sell for $20,000 and you owe $19,000 on a loan to buy it, the trustee will sell it, pay off the loan and use the remaining $1,000 toward other debts.
The trustee cannot take many pensions, disability payments, a burial plot, up to $1,000 of furniture and clothing or wages earned by military personnel.
This is just a smattering of the details that go into Chapter 7 bankruptcy. If your debts require you to seek bankruptcy protection, it is best to consult with a qualified, experienced bankruptcy attorney.