Chapter 7 bankruptcy has a reputation for diminishing people’s personal property. After all, it is nicknamed “liquidation bankruptcy.” Those who are filing may have to sell off or refinance some of their assets as a means of extracting value from their existing property to pay their creditors.
Only after making a reasonable attempt to pay as many creditors as possible can the party filing then seek the discharge of their debts as the culmination of their bankruptcy proceedings. State law in Kentucky and federal bankruptcy statutes create exemptions for some of a filer’s property. Filers can protect up to a certain amount of various assets from the liquidation process. And thankfully, most Chapter 7 filers don’t end up having to liquidate any of their property at all.
If you are a homeowner and you’re struggling with debt, you may be wondering whether the accrued home equity at someone’s primary residence is at risk in a Kentucky bankruptcy filing. That is a complicated question with a relatively complicated answer.
Only some equity is exempt from liquidation
Those who file for Chapter 7 bankruptcy can only protect a limited amount of their home equity. Kentucky exemptions allow for up to $5,000 in home equity. In other words, if someone paid $210,000 for their home and still has a principal balance of $205,000 or more, then their home equity won’t be at risk.
However, if they have accrued more in equity, they may have to refinance or even sell their home as a means of withdrawing equity to pay off creditors. For those with more home equity, the federal bankruptcy exemptions or filing for Chapter 13 might be better options.
Individuals can protect up to $27,900 and home equity using the federal exemptions. If the filer has more home equity than that, they may need to carefully consider whether Chapter 7 is truly the best option for their situation. A Chapter 13 bankruptcy, which would involve making several years of structured payments instead of selling off property, might be a better option.
Filing can help protect someone’s home
If an adult has fallen behind on payments or is in a situation where they simply do not have the income to fully cover their monthly expenses anymore, bankruptcy can help them prevent aggressive collection activity, like foreclosure, renegotiate some of their obligations and discharge debts to free up some of their income or other purposes.
Learning more about Chapter 7 bankruptcy can help people decide if it is a viable solution for their current financial needs.