One of the most common questions we hear from potential clients at The Law Offices of David I. Pankin, P.C. who own their home is: “If I file for bankruptcy, can I keep my home?” Typically, the answer is “yes, you can keep your home.” However, whether you can retain your property depends upon three primary factors: the amount of equity in your home, the exemption laws that are available to you, and whether you file under Chapter 7 bankruptcy or Chapter 13 bankruptcy.
How Bankruptcy Protects Homeowners
The moment a debtor files for bankruptcy, a powerful legal protection called the automatic stay goes into effect. This prohibits the continuation of all debt collection activities including lawsuits, collection calls or texts, wage garnishments and bank levies. An automatic stay also prohibits the continuation of a foreclosure action and can even stop scheduled sale dates. In Chapter 7 bankruptcy, qualifying debts can be eliminated entirely, but non-exempt property could potentially be at risk. In Chapter 13 bankruptcy, debts are reorganized into a manageable Court-approved repayment plan that can last up to 60 months, and non-exempt assets can be protected.
Both Chapter 7 and Chapter 13 bankruptcy can provide a stay against foreclosure proceedings, which is a concern of homeowners behind on their mortgage payments. However, only Chapter 13 offers a payment plan to pay back past due mortgages payments through a court ordered repayment plan. A Chapter 13 plan allows a debtor to spread the repayment of their mortgage arrears over 60 months and is typically interest-free. It also enables them to keep their current mortgage interest rate as well which is significant if they have a favorable rate compared to today’s market rates.
Bankruptcy Homestead Exemptions in New York
Bankruptcy exemptions allow a debtor in bankruptcy to protect certain assets, including equity in a primary residential home (including a house, condo or co-op). This is referred to a “homestead” exemption. Equity in a home is calculated as: Fair Market Value minus any Mortgage Balances. (This includes 2nd mortgage balances and home equity loans as well) By subtracting the mortgage balance(s) from the value of the home, a debtor will know what their property’s total equity is. If there are additional parties on the deed, their ownership interests are subtracted from that amount to calculate the debtor’s individual share of the equity in the property. Once calculated, the amount of equity a debtor has in their property can then be compared with the available homestead exemptions to see if their property would be protected, whether it is a house, condo or co-op. When filing for bankruptcy in New York, debtors have the option from selecting either the Federal bankruptcy exemptions under 11 U.S.C. § 522 or New York State exemptions under CPLR § 5205. A debtor can only choose one set of exemptions and cannot combine the federal and state exemption options. Both sets of exemptions contain a homestead exemption that allows debtors to protect equity in their primary residence.
The New York State Homestead Exemption
Comparatively, New York provides a fairly generous homestead exemption. The amount of protected equity in a home in New York depends on the debtor’s county of residence. The present exemption amounts are as follows:
- $204,825 – NYC Metro & Long Island counties: Kings, Queens, New York, Bronx, Richmond, Nassau, Suffolk, Rockland, Westchester, and Putnam.
- $170,700 – Hudson Valley & Capital Region counties: Dutchess, Albany, Columbia, Orange, Saratoga, and Ulster.
- $102,400 – All other New York counties.
If a married couple files jointly and both spouses jointly own the home, these amounts are doubled.
The Federal Homestead Exemption
The current federal homestead exemption protects equity in a home in the amount of:
- $31,575 for a single filer.
- $63,150 for married couples filing jointly and who are both on title to the property.
Since New York’s State exemption amounts are significantly higher than the Federal exemption amounts, most homeowners choose the New York State exemption option. However, the federal exemptions also include a “wildcard” exemption ($1,675 plus up to $15,800 of unused homestead protection) that can be useful for protecting other assets such as bank deposits that do not have a specific exemption allowed for in the New York State exemption system.
Protecting Equity in Home in Bankruptcy
A debtor can keep a home in Chapter 7 bankruptcy provided their share of the equity is protected by a homestead exemption. For example, if a home is worth $700,000 and the mortgage balance is $550,000, the equity is $150,000. In this example, a debtor would choose the New York State exemptions since the Federal homestead exemption would leave $118,425 equity exposed. Alternatively, if a debtor’s home is worth $700,000 and their mortgage balance is $680,000, then their equity in the property is only $20,000. In this example, they would choose the Federal exemption. This debtor would be able to protect their home and also use the remaining $11,575 of the wildcard exemption to protect any additional asset. Additionally, in New York, the Federal homestead exemption is often used when a debtor is protecting a Mitchell-Lama co-op since they have equity values that typically range from $7,500 to $15,000.
If a debtor has too much equity to protect in a Chapter 7 bankruptcy, they have two options: (1) they can potentially negotiate with the Chapter 7 Trustee to purchase their interest in the non-exempt equity from the bankruptcy estate, or (2) they should consider filing for Chapter 13 bankruptcy.
A debtor can also keep a home in a Chapter 13 bankruptcy proceeding as long as they pay at least the non-protected equity amount through the court ordered payment plan. This is because creditors have to at least be paid back what they would potentially receive in a hypothetical Chapter 7 bankruptcy case. Depending upon a number of factors, a debtor still may only have to pay a small percentage of their unsecured debt back. For example, if a debtor’s equity in their property is $30,000 over the exemption limit and they owe $100,000 in unsecured debt, they may potentially only have to pay back the $30,000 and not the full $100,000.
Keeping Your Home in Chapter 7 Bankruptcy
When a homeowner files for Chapter 7 bankruptcy and they are seeking to retain their home, the debtor’s equity in their property must fit within the available exemptions. Typically, this means selecting the New York State exemption, since it is much more generous than the Federal exemption. Next, it must be determined if the Means Test applies to their case. The Means Test applies when a debtor owes a majority of consumer debt (and a mortgage counts as consumer debt) and their household income, as defined by the Bankruptcy Code, is above the median income for their particular household size in New York. If your income is below the median, you may qualify for Chapter 7, but if your income is above the median, you must perform the Means Test calculation. All household income is included in the test with explicit exemptions for the debtor’s Social Security, Veteran’s and DoD benefits. The Means Test calculation uses IRS local and regional standards in place of many of a debtor’s actual expenses in an attempt to determine whether they have sufficient disposable income to pay a hypothetical Chapter 13 plan payment. If the debtor passes the Means Test, a debtor may file for Chapter 7, otherwise they are restricted to Chapter 13.
If you qualify for Chapter 7 bankruptcy and your equity falls within the applicable homestead exemption, you can typically keep your home. However, if a homeowner is delinquent on their mortgage during their bankruptcy case, the mortgage lender can initiate or continue a foreclosure action when the case is over.
Keeping Your Home in Chapter 13 Bankruptcy
A debtor may not be a candidate for chapter 7 bankruptcy for a number of reasons:
- Their income is too high,
- They have too much disposable income,
- They have non-exempt assets such as non-protected equity in a home,
- They are facing foreclosure and need a payment plan to cure their past due mortgage arrears.
In these circumstances, Chapter 13 bankruptcy can provide the best option for debt relief. In Chapter 13 bankruptcy, the focus is on whether a debtor can propose a feasible repayment plan to pay their debts based on their income and expenses. If a debtor is behind on their mortgage, a Chapter 13 bankruptyc filing can stop a pending foreclosure action and enable them to pay back mortgage their arrears through a 5-year payment plan that is typically interest free.
Once the case is filed, the debtor will resume paying their regular monthly mortgage payments while paying the arrears through the Chapter 13 plan. Simultaneously with resolving any mortgage arrears, Chapter 13 bankruptcy also helps debtors resolve other debts such as credit card balances, personal loans, tax obligations, and utility arrears, which will also be addressed within the plan.
As mentioned above, in some cases, unsecured nonpriority creditors only have to be paid a percentage of what they are owed. Any remaining balances for these debts will be eliminated by a discharge at the end of the case. In certain situations, Chapter 13 bankruptcy may also allow for lien stripping of a wholly unsecured second mortgage, depending on property value and lien priority. However, due to recent appreciation of housing values, it is less common to find situations where there are underwater second mortgages.
Post-COVID Home Value Increases and Unprotected Equity
Since 2020, many areas of New York have experienced significant increases in residential property values. While rising home prices are generally positive for homeowners, they can create unexpected issues in bankruptcy. A homeowner who purchased a property years ago may have built substantial equity simply due to market appreciation driven by low inventory and high demand. As a result, more homeowners today have equity that exceeds the available homestead exemption limits. For example, someone who bought a home for $400,000 in 2015 may now see a market value of $750,000 or more. That appreciation can create equity that was not necessarily anticipated. If that equity exceeds the applicable exemption amount, it would be unprotected in a Chapter 7 case.
This makes careful property valuation more important than ever. We typically recommend obtaining a professional appraisal if a debtor’s equity is close to the exemption amount rather than relying solely on Zillow, Redfin or other online estimates. A Trustee assigned to a case reserves the right to obtain their own property valuation. Accordingly, it is vital to make sure the property value listed in the debtor’s schedules is an accurate number and properly supported when filing for bankruptcy. An accurate appraisal can help determine whether a Chapter 7 filing is advisable, or whether a debtor is better off in a Chapter 13 case.
Contact The Law Offices of David I. Pankin, PC
Before a homeowner files for bankruptcy, it is essential to carefully analyze their home’s equity and determine which exemption system best protects them (in most cases this will be the New York State exemptions). For almost 30 years, the Law Offices of David I. Pankin, PC, have represented over 15,000 clients in both Chapter 7 and Chapter 13 bankruptcy matters. We have helped save thousands of homes along the way as well. Contact our office today at (888) 529-9600 or with our easy online contact form to schedule a free consultation and learn how bankruptcy may help you protect your home and your financial future.
Frequently Asked Questions
What happens to my house if I file for Chapter 7 bankruptcy?
In most cases, you can keep your home in a Chapter 7 bankruptcy, as long as your equity fits within the available homestead exemption. If it doesn’t, you may still have options, like negotiating with the trustee or switching to a Chapter 13 filing instead.
Can Chapter 13 bankruptcy stop a foreclosure on my home?
Yes. The moment you file, an automatic stay goes into effect and immediately halts foreclosure proceedings, even a scheduled sale date. Chapter 13 bankruptcy goes a step further than Chapter 7 by letting you catch up on missed mortgage payments through a court-approved plan, usually spread over 60 months and interest-free.
What’s the difference between Chapter 7 and Chapter 13 bankruptcy when it comes to keeping my home?
Chapter 7 bankruptcy can eliminate qualifying debts quickly, but it doesn’t offer a repayment plan for missed mortgage payments. Chapter 13 bankruptcy is built around a repayment plan, so it’s usually the better fit if you’re behind on your mortgage or have equity that exceeds what Chapter 7’s exemptions would protect.
How much home equity can I protect if I file Chapter 7 bankruptcy in New York?
It depends on where you live. Homeowners in NYC, Long Island, and the surrounding metro counties can protect up to $204,825 in equity. Hudson Valley and Capital Region counties top out at $170,700, and every other county in the state is capped at $102,400. Married couples who jointly own the home and file together can double whichever amount applies to them.
My home’s value has gone up a lot. Could that affect my Chapter 7 bankruptcy filing?
It can. Rising home values across New York mean plenty of homeowners now have more equity than they realized, and equity above your exemption limit isn’t protected in a Chapter 7 bankruptcy case. If you’re anywhere close to that line, it’s worth getting a professional appraisal rather than relying on a Zillow estimate, since a bankruptcy trustee can order their own valuation and challenge the number on your paperwork.
