A HOMEOWNER who files for bankruptcy gets to exempt or keep his house despite bankruptcy if he is able to exempt the equity of his residence. Equity is defined as the fair market value of the residence on the date bankruptcy is filed minus the mortgages on the residence.
The fair market value may be established by the testimony of the debtor but may be disputed by the chapter 7 trustee if he thinks the value stated by debtor is wrong. If the value is disputed by the trustee, debtor or trustee may file a motion to have the court rule on the value of the property. When real estate prices are down, trustees do not normally dispute debtor estimates. But when real estate prices are up, residence values can become a bone of contention. Appraisal reports are submitted, and appraisers are sometimes asked to testify to support trustee’s or debtor’s position. The court’s judgment on value after a valuation hearing is usually a final determination of the matter. To illustrate, if debtor estimates the fair market value of residence to be $300,000 while the balance of the mortgage is $250,000, the equity is $50,000. In order for debtor to keep his house in bankruptcy, he must be able to claim the entire $50,000 equity as exempt. A comparable sale of similar houses in the neighborhood is a good basis for estimating fair market value. The extent of equity that can be exempted in California depends on the personal circumstances of debtor. Before the increase of $25,000 which took effect on January 1, 2010 through Assembly bill 1046, debtors qualified for homestead exemptions as follows: 1. A single person who is not head of a household $50,000; 2. A head of household whether single or married $75,000; 3. A senior citizen of 65, or one who is disabled or has limited income $150,000. But effective start of 2010, these exemptions were increased by $25,000 per category. Thus, a single person may now exempt $75,000, head of household $100,000, and a 65 year old $175,000.
This is a great development for debtors who have judgment liens. These are involuntary liens on the residence arising from civil judgments. Mortgages, on the other hand, are voluntary or consensual liens on the residence. To illustrate, in the foregoing example, debtor has 2 judgment liens from credit card debt for $20,000 and $30,000 on his residence. When debtor files for bankruptcy, he can ask the court to nullify or cancel the 2 judgment liens on his residence. If these liens are not annulled, they would be paid off in full if the house is sold. If they are annulled, the house would be free and clear of any liens except for the outstanding mortgage. For instance, debtor files for bankruptcy today but does not annul the 2 liens in his bankruptcy. Later this year, he sells his house for $300,000. Will he be able to get his homestead equity of $50,000? No. Since he did not annul the liens in his bankruptcy, the 2 judgment liens will be paid from the sale proceeds and that will wipe out his equity. But, if he annulled the 2 liens in his bankruptcy, the entire equity of $50,000 would go to him upon sale of his residence. An extreme example is client who has a judgment lien for $600,000 on her residence. Since she is over 65, she can annul $560,000 of the lien, leaving a valid lien of only $40,000 on her house. But a $40,000 lien is still a problem for a senior citizen with limited income even if $40,000 is a lot less than $600,000! To make matters worse, lien arose from a judgment where client was an innocent defendant and had nothing to do with the complaint of plaintiff which was directed against her employer. She never filed an answer, thinking her employer’s settlement of the case relieved her from liability. That was the $600,000 mistake of her life!
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave., Bldg. A-1 Suite 1125 Unit 58, Alhambra, CA 91803.
( Published March 13, 2010 in Asian Journal Los Angeles p. C4 )
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