Is Home Equity at Risk in a Chapter 7 Bankruptcy?

A Chapter 7 bankruptcy is sometimes referred to as a liquidation because the court-appointed trustee has the power to sell a petitioner’s non-exempt assets to repay their creditors. That label tends to scare many homeowners who assume they will automatically lose their homes and the equity they have built. In reality, whether someone’s home equity is at risk depends on the amount of equity that exists and how much can be protected under state law. 

Many people who file for Chapter 7 bankruptcy never lose any of their property. State laws and federal regulations outline exemptions that allow filers to protect specific assets from liquidation requirements in a Chapter 7 bankruptcy, including a portion of the equity in their primary residence. If the available exemption fully covers the filer’s home equity, the trustee has no basis to sell the home. 

Having opted out of the federal bankruptcy exemption system, Georgia law controls the exemptions available to residents of this state who file under Chapter 7. Georgia statutes specifically include exemptions for a filer’s primary residence. A homeowner filing individually can exempt up to $21,500 in home equity, while married couples filing jointly can exempt up to $43,000. These protections apply only to a primary residence, not to vacation homes or investment properties.

The key issue is the amount of equity in the home. Equity is calculated by subtracting the mortgage balance from the property’s current fair market value. This can sometimes prove problematic in a rising housing market, since homeowners have more equity than they realize, even if they have not paid down a significant part of their loan. 

If the equity exceeds the available exemption, the trustee may seek to sell the property to access the non-exempt portion – although even this depends on whether the sale would make a meaningful dent in their debt after all costs are considered. The homeowner is then entitled to the exempt portion of their equity after the sale. For homeowners with significant home equity, Chapter 13 bankruptcy may offer a viable alternative that will allow them to keep their home and still obtain debt relief.

Reviewing financial records with a bankruptcy lawyer can help homeowners determine if a Chapter 7 bankruptcy filing is an appropriate solution for them. It is not a one-size-fits-all solution. A skilled bankruptcy attorney can review the specific details and advise on the best options available. 

Jeff Field & Associates assists Georgians who are determined to keep their homes while addressing their debt relief needs through Chapter 7 or Chapter 13 bankruptcy. You can schedule an initial consultation by calling 404-381-1278 or contacting us online. We represent clients statewide from our six offices in Douglasville, Gainesville, Bogart, Lawrenceville, Marietta and Decatur.