Bankruptcy is a fairly solid way of getting relief from your debts, but that benefit comes with a cost. The trustee in your case will take any non-exempt assets, sell them, and distribute the funds to your creditors. This includes any unprotected equity in your home. If your home equity balance exceeds the exemptions the law provides you, you may be forced to sell your home so the trustee can get that money. Here are two things you can do to avoid that outcome.
Maximize Exemptions with Pre-bankruptcy Planning
If the homestead exemption doesn't fully cover the equity in your home, there may be other exemptions you can apply that will offer additional protection. For instance, there is typically a wild card exemption you can use to protect property that may not qualify for an exemption or is more valuable than the exemption amount.
The issue here is, you have to make sure you don't need to use that exemption (or additional ones that could help) for other assets. If you have unprotected assets, you may need to do a bit of pre-bankruptcy planning to free up money to use to protect your house. The federal vehicle exemption amount is $3,775. If you own a vehicle that's worth more than that, you may need to sell it and buy something cheaper and use the profits you make to purchase exempt property, for example. This will ensure you won't need to use the wildcard exemption to protect the equity in your vehicle.
It's important to consult with an attorney before doing any pre-bankruptcy planning, because you could be accused of fraud if you do it the wrong way. The attorney can advise you on the best steps to take to ensure any steps you take are legal and won't get you in trouble with the bankruptcy court.
Negotiate with the Trustee
The other option available to you is to negotiate with the bankruptcy trustee. Trustees generally don't want to take people's homes, especially if it's their primary house and selling it will cause the homeowners to become homeless. However, it is the trustee's job to collect as much cash as possible to pay the creditors.
Depending on the amount of unprotected equity you have in your home, it may be possible to convince the trustee to let you pay the difference instead of selling the home. For instance, if you have $50,000 worth of equity and the exemption is $25,000, you could negotiate with the trustee to pay the leftover $25,000 in cash.
In most cases, you can even get the trustee to accept an amount that's significantly less than the leftover equity, because the cost of selling the home will eat into any profit the trustee hopes to make on the house. Thus, that $25,000 can easily become $10,000 or even $5,000, and you'll usually be given a few months to come up with the money.
For more tips on protecting your home in bankruptcy, contact an attorney like Greg Dunn Bankruptcy Attorney.