One of the questions that comes up in just about every conversation I have with Indiana clients is whether filing bankruptcy automatically means losing one’s home. In fact, months ago, in my blog Foreclosures And Bankruptcy – Do They Always Go Hand In Hand?, I explained that each clients’ situation is different, and that the initial planning meetings I hold with my Indiana bankruptcy clients are focused on reviewing all their options and coming up with a plan that is best for them. Now, the bankruptcy system in each state involves a series of rules designed to treat creditors fairly while at the same time helping people who’ve fallen on hard times get their lives back together again.
There are two basic types of individual bankruptcy that can be filed in the state of Indiana. The one most likely to involve questions about whether the home can be saved is Chapter 7 bankruptcy. Chapter 7 is a liquidation, which means that after certain exemptions (assets the debtor is entitled to keep), assets might be sold by the bankruptcy trustee (an employee of the bankruptcy court) and the proceeds set aside to pay creditors. (In the real world, clients’ assets almost always fall within the exemption amounts, and no assets are lost.)
The first step is to figure out what equity the debtor has in the home, meaning the market value of the home minus debts on the home. Debts would include the mortgage, a second mortgage, any liens, etc.. If the fair market value is more than what is owed on the home, there is no equity, and the debtor is allowed to keep the home. If there is a considerable amount of equity in the home, the court could decide to force a sale, so that the extra money can go to pay creditors. One factor that comes into play is called the Homestead Exemption. This is a dollar amount that can be protected in a Chapter 7 bankruptcy, and in Indiana that amount is currently $15,000 per person. What this means is that, if a person has equity in his home, but that equity doesn’t exceed $15,000 (for married couples, it’s $30,000), the Chapter 7 bankruptcy trustee will not be able to force a sale of the home in order to pay creditors.
To me, having practiced bankruptcy law for close to twenty-five years, the most important message in all this is for people to seek help at the first signs of financial trouble. As you can see, there are many facets to planning a bankruptcy filing, and many important choices to be made. The earlier in the process a debtor receives professional help and advice, the greater the number of options will be open to him or her.
The bankruptcy court system was put into place not to blame or punish debtors, but to help them. In order to take maximum advantage of that help, debtors need to weigh all their options while those options are available. Eviction notices, foreclosure notices, wage garnishments – all these are things that didn’t need to happen, signs a debtor has waited much too long to get help. The homestead exemption is just one feature of our bankruptcy law that can be used in crafting a plan that reduces delay and move the process along – so the debtor can move forward to the rebuilding part of the bankruptcy story!