Last time, we looked very briefly at the homestead exemption available under both Wisconsin and federal law. The homestead exemption, as we’ve mentioned allows a debtor in Chapter 7 bankruptcy to exemption a certain amount of equity in his or her home.
Equity, of course, refers to the amount of ownership interest a debtor has in the residence which exceeds the home’s fair market value. Home equity depends on both the amount of the mortgage that has been paid off and the current market value of the home. The question for many debtors contemplating bankruptcy, particularly Chapter 7 bankruptcy, is: will I be able to keep my home?
Generally speaking, those who want to avoid losing their home in bankruptcy should pursue a Chapter 13 filing, which allows a debtor to come up with a repayment plan based on his or her financial situation rather than the value of his or her property. That said, it may be possible for a debtor to keep his or her home in bankruptcy, though this depends on the amount of the homestead exemption and the amount of equity the debtor has in the home.
In cases where the market value of a home is less than the amount of money the debtor owes on the mortgage–in other words, when there is no equity or negative equity–selling the home wouldn’t do any good for creditors and the homestead exemption doesn’t do any good for the debtor. In cases where the debtor has more equity in the home than is allowed by the homestead exemption, the home may end up being sold, though this does depend on the costs involved in selling.
When the debtor’s home equity falls within the homestead exemption, he or she can benefit. Because many seriously struggling debtors do not have equity in their home, though, Chapter 13 bankruptcy will often be a better way to save their home in bankruptcy. Whatever the circumstances of the case, it is important to work with an experienced bankruptcy attorney to receive clear guidance and solid advocacy.