In our last blog we talked about how the home values have fallen during this Great Recession. Particularly, we showed how, both nationally and in the Portland area, prices recovered somewhat during portions of 2009 and 2010 but have been again decreasing and, particularly in Portland in the last couple of months, at a steep rate.
There is a silver lining to this continuing bad news, if you are considering filing bankruptcy. Reduced, and still reducing, home values have many consequences in a bankruptcy case, and mostly positive ones. Here are two of the most important ones. In our next blog, we’ll give you a few more.
1. Keeping your home through a Chapter 7 case: Although most people who own a home and are being forced to consider bankruptcy have no equity in their homes, some still do have equity. If you file a Chapter 7 case and have too much equity in your home—in Oregon, more than $40,000 for a single person and more than $50,000 for a couple—then you could risk losing that home to your creditors. But with the ongoing downward slide in values, homes that just a year or two were worth too much, now may well no longer be.
Another twist of this: Although for bankruptcy purposes your home’s property value is determined as of the day your case is filed, the general downward direction in home prices means that if your home value is close to the edge—maybe a bit more equity than the permitted homestead exemption—the Chapter 7 trustee is going to be less inclined to be interested in your house. That’s because by the time the property would actually be sold, it will likely be worth less, and perhaps less than your homestead exemption. The trustee generally cannot sell your house if, after paying you the homestead exemption, there would be no money left for your unsecured creditors.
But careful: when eventually the prices DO start going up, the opposite happens—the trustee will be MORE inclined to go after real estate that is on the edge of having equity beyond the homestead exemption.
2. Paying less or even nothing to your unsecured creditors in a Chapter 13 case: In a Chapter 13 payment Plan, one significant factor determining how much you must pay to your unsecured creditors is the amount of equity in all your assets—including your home—beyond the applicable exemptions. One major reason people file Chapter 13 instead of Chapter 7 is to protect such “non-exempt assets.” A reduction in home value means that you may well be permitted to pay your unsecured creditors that much less.
For example, if a year ago you and your spouse owned a home then worth $250,000, with a mortgage of $180,000, that home had a gross equity of $70,000. That is $20,000 more than your $50,000 homestead exemption, meaning that you would have to pay at least that much to your unsecured creditors in your Chapter 13 Plan. But if the home’s value fell by the average Portland rate of 7.8%, your home would now be worth about $19,500 less, or about $230,500. Let’s assume that the debt did not go down at all (if you miss just one payment or make a few payments late, the extra fees and/or interest will usually more than make up for any of the slow progress on the principal balance). That means that the home would be only $500 over the homestead exemption instead of $20,000 over— the current home value of $230,500 minus $180,000 debt = $50,500 in equity, minus $50,000 exemption = $500. All other things being equal, that Chapter 13 plan would cost you about $20,000 less to pay off.
Please visit us in two weeks for our next blog on more advantages of lower home values in bankruptcy. We’ll talk about judgment lien avoidance and “stripping” second mortgages.