Can I Keep My House If I File Bankruptcy? – September 2016 Interview

Katherine:

Today we are being joined by our friend attorney Pete Moak, and he’s going to talk with us more bankruptcy, but today’s topic is can I keep my house if I file bankruptcy? That’s something … Actually, Pete I have no idea why that crossed my mind today, not that I need to file bankruptcy, but that was something that I was wondering, can a person keep their house when filing bankruptcy? Just thinking of the different dynamics, maybe their car is paid for, but what would be left if I keep my house, what would go into bankruptcy was more of what I think my mind was brainstorming on. Now that I know that this is your topic, I’m going to get some answers just being curious. Welcome back, how are you?

Pete Moak:

I’m doing wonderful, thank you very much. It’s interesting how great minds travel in the same channels, huh?

Katherine:

I’ll tell you.

Pete Moak:

I was preparing on this topic, and you were thinking on the topic as well, so that’s good.

Katherine:

That’s right. Let’s see … Let me see what you’ve got.

Pete Moak:

All right. This is a very common question, because most people have much of what they have worked their lives for invested in the home where they live. This is called your homestead. There are laws that are governing every state with regard to what can you keep if a creditor comes to you and says, “You have a debt that you owe, and you’ve got to pay me,” and what can the creditor use to force you to pay the debt? Almost all states have an exemption that allows you to keep your home up to a certain amount of equity. I’m going to go through what those rules are, so if somebody asks the typical question, “Can I keep my home?” The answer is almost always, yes.

Katherine:

Okay.

Pete Moak:

It does depend on several things. A person who’s evaluating this has to be knowledgeable about the applicable exemption laws. Which exemption laws are going to apply to your case depends of course on where you file bankruptcy, but more importantly on when you file bankruptcy, and which state laws are the laws that are going to govern your case is in part dependent upon where you have been residing or better yet, the term is where were you domicile? In other words, where is the home that you claim as your home. That is the home state, the state where you say this is my home, I may go off and work in another state, or I may go off and be in the military, or I may do other things, but this is the home I always come back to. This is my home, and it does depend on where you were domiciled, which is kind of an unusual term for people, but that’s what it means is basically where you intend to have your home state.

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Katherine:

Okay.

Pete Moak:

That’s the number 1 issue because back some years ago the congress indicated that they didn’t want people to be able to run to another state that has more favorable exemption laws and file bankruptcy in that state just so that they can get relief from the creditors making a claim and keeping the assets that are not exempt in their home state. If a person is in a state that has a very low homestead exemption, would they be able to run to Arizona for example that has a generous homestead exemption and file bankruptcy here right after they move here? The answer is no, they couldn’t do that. They would have to be in Arizona for a period of at least 2 years in order to be able to use Arizona’s exemption laws.

Katherine:

Okay.

Pete Moak:

That’s one of the rules. This is basically what was called a mansion loophole. A lot of people remember the case involving OJ Simpson, and how he was sued by the Goldman’s. Anyway, he went to Florida and put all his money in a big mansion. Florida happens to have a very generous homestead exemption, 100% of the value of the home is protected …

Katherine:

Oh, okay.

Pete Moak:

From creditors. That was what he did, and congress kind of reacted to that, and to other people who had done similar things, and changed the laws to make it so that a person had to be domiciled in that state for at least 2 years immediately prior to the filing of the bankruptcy case in order to use that states exemption laws.

Katherine:

Okay.

Pete Moak:

We have in Arizona a $150,000.00 homestead exemption. Some states have lower exemptions. Then of course there are some circumstances where a person would be required to use federal exemptions, which doesn’t have as much of a homestead exemption as Arizona does. Depending upon where you file, how long you’ve lived there, and when you file, will effect whether or not you get to keep your home. The other big issue is whether or not the house that you’re trying to protect is your primary residence. In other words, is this the home where you claim as your home where you live? Sometimes people own investment property, they have a house that maybe they bought and then time went on and they outgrew that house, they decided to keep that house as an investment so they rented that house out, and now it’s rental property, it’s not the house that they live in, it’s not their home where they’re residing, it’s investment property.

Investment property is typically not exempt. Certainly it’s not exempt under the homestead exemption. It depends upon whether the home is an investment property, or if it’s the home where you live. In other words, your homestead. Then also you have to evaluate what is the amount of equity? Because it is the amount of the equity that determines how much of the … In other words, is the amount that’s exempt under the law more than what you have in the way of equity? If it is, you’re safe, okay. If the equity is too high, it’s above the amount of the exemption, then the home is at risk. For example, let’s say you have a home that has $250,000.00 of equity. Well, Arizona can only protect $150,000.00 of equity, so you’ve got $100,000.00 of equity in excess of the homestead exemption and if you file bankruptcy the trustee can require that you sell the home in order to pay the debts that you owe. That money that would be used by the trustee if they sell the home, the first $150,000.00 would go to the debtor, to you, the person who owns the home. Then the balance would be used by the trustee in the bankruptcy case to pay the various creditors on a proportional basis.

How much is the equity, and how do I know how much the equity is? Well, that depends of course on what is the current market value of the home. In other words, if it were to be sold how much money would it bring. A lot of times that depends upon location, size of the home, and many other factors. A good source for that would be a broker price opinion, or an appraisal, and even sometimes just using a web service like Zillow will give you a good handle on what is the fair market value of the home. Then of course you have to determine what are the liens against the property. Liens are claims against the property. When you buy a home, you have 2 documents that you are required to sign. Let’s say … This is of course only if you borrow money to buy the house. If you buy a house cash, you don’t have both of these, but if you borrow money with a loan, then the lender of course requires the person who borrowed the money to sign what’s called a promissory note. The promissory note says, “I promise to pay,” and it’s usually this very, very large number that you’re going to pay over the next 30 years.

Anyway, once you pay with interest you’re paying several times that amount. Nevertheless, that’s the promissory note. The promissory note is one document, and the other document is some sort of security agreement. A security agreement, in most people’s language they use the term mortgage. There’s a little bit of difference between a mortgage and a deed of trust, but both of them are security documents. In other words, when the buyer signs the security agreement, in Arizona it’s almost always a deed of trust, but when he signs that security agreement he’s saying, “If I don’t pay the amount that’s due under the promissory note, I give permission to the lender to foreclose on my home, sell the home, and use the money to pay the debt.” If you don’t pay, they still get to take the property. Now, that security agreement that you voluntarily sign when you borrow money survives the bankruptcy.

If you file bankruptcy that still doesn’t eliminate the chance that you could lose the home. If you don’t make the payments, they can foreclose. They have to get permission from the bankruptcy judge to do it, but at least during the time prior to the discharge. The amount of the value of the home is important, and how much is the amount due on the mortgage. In other words, the payoff amount. At the time that a person’s filing the bankruptcy we need to look at how much will it take to pay the mortgage lender the balance due? Subtract the balance due on the mortgage from the amount that is the fair market value and you get the equity. Well, before you go there though you have to investigate, are there any other liens? Sometimes people have a home equity line of credit. That home equity line of credit is also a lien against the property. Now you have to deduct from the fair market value not only the mortgage loan, but also the home equity line of credit.

Even there it’s not complete, because you have to also look and see are there any recorded judgments against the homeowner? If there is, then you have to deduct that from the value of the home to determine the net equity in the home. Anyway, when you investigate and determine what liens are deducted from the fair market value, then you come up with the equity. Then you look and compare that amount of equity to what’s exempt under the applicable bankruptcy, or applicable exemption laws. If you file bankruptcy in Arizona for example and you’ve been domiciled in Arizona for 2 years prior to the filing of the bankruptcy, then you can compare that to the figure of $150,000.00. By the way, in Arizona, and this is true for federal law all over this country, the amount may be effected by how long you’ve lived in the home. If you’ve lived in the home for 1 year, you may be limited to only exempt $125,000.00 of equity, not 150. If you’ve lived in the home for 4 years or longer, you can protect all $150,000.00 of equity, okay.

Those are the factors that determine whether or not you get to keep your home. Like I said, most people who have lived in Arizona for a while, when they file bankruptcy we’re going to look at these issues to go ahead and help them understand what they can protect in the way of their property. The most significant property that people have of course is their homestead. That’s an important factor before one dives into the water of bankruptcy, they need to understand those issues, and of course the best way to do it, in fact the only wise way to do it, is to sit down with an attorney who’s experienced and competent to give them the good information regarding how these rules are going to work in their specific case. This is not something which somebody should do it on their own without talking to somebody who’s knowledgeable on these laws.

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Katherine:

This has been, again, a wealth of information. Thank goodness that the radio show can go into replay, because people are going to have to go back and to listen again to see where they may fall into that, or they can do one better, is give you a call. How can they get in touch with you Pete outside of This Needs to be Said?

Pete Moak:

Well thank you for asking that, and yes, we’re happy to talk with people and we can give them some advice and guidance. We like to eventually sit down with them in person to go over the things that are going to be required to get them the debt relief they need. Please do call, it’s 480-755-8000, extension 1. That will allow you to talk to my assistant who makes my appointments, and we can schedule a time for us to visit and be able to come into the office and sit down and go over the things that you need to do in order to consider the issue of how to get out of debt. The initial consultation is 30 minutes free, and of course we’re able to make a decision usually in that period of time whether or not it’s worthwhile to go forward. Then we help people out with payment plans, so we don’t require everything to be paid at once, we can work it out with them and make it so that it’s affordable. I make the promise to everybody that comes in to see me that I will do everything I possibly can to make it affordable for you to be able to get the debt relief you need.

Katherine:

Awesome. Until next time, have a wonderful day Pete.

Pete Moak:

Thank you very much, take care.

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