The New Biggest Danger of Chapter 7 – Loosing your Home and your Homestead Exemption
In California, a homeowner may file a Declared Homestead with the County Recorder that gives rights to the homeowner in connection with voluntary sales. For instance, if the homeowner defaults on a credit card bill and the credit card company sues the homeowner and obtains a judgment. The credit card company records a Judgment Lien against the homeowner's residence. The homeowner sells the residence. The lender is the first to be paid, the Declared Homestead protects the homeowner’s Homestead Exemption so the Judgment Creditor receives whatever is left after the lender and homeowner are paid. Then the Homeowner has six months to purchase another place to live with the Declared Homestead amount or loose the Declared Homestead amount.
What happens if the homeowner files a Chapter 7 Bankruptcy after the home is sold and before purchasing another home? If the homeowner, now a Chapter 7 Debtor, does not purchase a new home within six months of the sale, the Chapter 7 Trustee will ask the Debtor to turn over the money and the Trustee will distribute the Declared Homestead amount to the Debtors unsecured creditors. The six-month period starts from the day the home is sold. Filing a Bankruptcy does not extend the six months. Here’s the danger: If the Debtor does not qualify to purchase another place to live, the Debtor loses the homestead amount.
What if the homeowner did not file a Declared Homestead, sold the residence and filed bankruptcy still holding cash from the sale? The Debtor must find another way to exempt the cash or the Trustee will ask the Debtor to turn over the money. Since the home is already sold and the Debtor did not file a Declared Homestead, the debtor cannot claim a homestead exemption. Here is the danger: The Debtor loses the homestead amount unless the amount qualifies under another exemption.
What if a homeowner is facing a foreclosure and files a Chapter 7 Bankruptcy to stop the foreclosure? The Homeowner/Debtor can claim a homestead exemption on his/her schedules even if the Homeowner/Debtor did not file a Declared Homestead before the Chapter 7. This is known as an automatic dwelling exemption. Usually, the Bankruptcy Court will grant the lender the right to foreclose if the homeowner is not current with monthly payments and there is little or no equity in the property.
So let’s say the Court granted the lender the right to foreclose on the Chapter 7 Homeowner’s residence and the residence sold for more than the lender was owed. The Chapter 7 Homeowner received some money under the automatic dwelling homestead exemption. The Chapter 7 Former Homeowner has six months to spend the money on another home or the Trustee will ask the Chapter 7 Former Homeowner to turn over the money and the Trustee will distribute the money to the unsecured creditors. Here’s the danger: If the Debtor does not qualify for a new loan and cannot find a home for the amount received under the automatic dwelling homestead exemption, the Debtor loses that money.
Now, what if an Elderly Couple files Bankruptcy and they claim an exemption for the $150,000 of equity in their home. Their home is worth $500,000 and they have a loan of $350,000. The Chapter 7 Trustee may sell their home and give the Debtors their $150,000 they claimed as exempt. The elderly Couple has six months to buy a new home. What happens if the elderly couple cannot qualify to purchase a new home in the six months? The Chapter 7 Trustee asks the elderly couple to turn over the $150,000 and the Trustee distributes it to the unsecured creditors. Here’s the danger: They have lost their home and their $150,000.
What if the Trustee didn’t indicate the home would be sold at the Creditors Meeting? What if the Debtor received a discharge and the Trustee still didn’t ask the Debtor to turn over the Homestead Exemption Amount? What if the Trustee filed a No Asset Report? How long does the Trustee have to claim the Debtor’s Homestead Exemption? Until the case is closed.
What if the Debtor decides to sell their home after they file Bankruptcy? Their homestead exemption is safe from the Chapter 7 Trustee if they filed a Declared Homestead before the Chapter 7 Case otherwise, the Chapter 7 Trustee may ask the Debtor to turn over money from the sale. The Danger: The Debtor has no home and no money to buy another.
How much of your homestead exemption can the trustee keep? Enough to pay your unsecured creditors, the costs to sell your residence, the Trustee’s attorney fees, and any other professionals the Court approves for the Trustee to Employ to sell your residence.
Filing a simple Chapter 7 Bankruptcy for the forgiveness of unsecured debt? Be sure and seek qualified assistance or you may end up losing a lot more than your unsecured debt.
There are ways to protect your Home and Homestead Exemption.
Seek competent counsel so you have a better chance to keep your home and/or your homestead exemption.