72 West End Avenue
Somerville, NJ 08876
72 West End Avenue
Somerville, NJ 08876
For individual Chapter 7 or Chapter 13 filings, the issue of what may happen to the client’s most valuable asset, a home, requires thoughtful analysis and strategy. New Jersey only allows the federal bankruptcy exemptions under 11 U.S.C. §522(d) that protect the debtor’s aggregate interest not to exceed $22,975.00 of value in real property owned by the debtor that is used as a residence. In a joint case the real estate exemption is doubled.
In every case, I recommend that the clients contact a local realtor to obtain a comparative market analysis (CMA) promptly to determine whether there is equity in the home. In Chapter 7 filings, if there is excess equity, trustees generally apply a formula that utilizes 10% costs of sale in determining if debtors have equity over the exemption. Nonetheless, each trustee differs in how they utilize the formula and has the right to independently appraise or obtain his own CMA for the debtor’s residence. The petition requires a debtor to disclose, to the best of their knowledge, the market value of the property. The value of real estate can be an elusive concept and often is the subject of disagreement when trustees undertake their own analysis.
In a case where it is determined that a debtor has substantial excess equity over the exemptions, it is likely preferable to file a Chapter 13 wage earner’s plan that can cure any mortgage default and pay over time all disposable income to fund a Chapter 13 plan to unsecured creditors. The confirmation requirements set forth in USC 1329 (a)(4) require a proposed plan to provide a distribution of no less than a creditor would receive in a theoretical liquidation under Chapter 7. In many instances, debtors have fallen several months behind on their mortgage payments.
The decision whether to file a Chapter 7 or Chapter 13 is dictated by the need to cure several months of mortgage arrearages through the Chapter 13 plan. In cases where Chapter 7 is the chosen path and a dispute arises with the Chapter 7 trustee regarding the amount of equity in the property, I have been successful in negotiating creative settlements with time payments to the trustee to resolve these issues. In cases where only one of two spouses file Chapter 7, the non-filing spouse is presumptively entitled to half the equity in the property and the right of first refusal to match any offer that may be received by the trustee. In single debtor cases with jointly owned property, a trustee has no automatic right to sell the property unless they file an adversary proceeding under 11 U.S.C. §363(h) and meet a balancing test to show inter alia that the sale of the estate’s undivided interest in the property would realize less for the estate than the sale of the property free and clear of the interest of the co-owner.
In Chapter 13 cases, the trustees do not accept many of the internet based valuation methods for property such as Zillow. It may be necessary to prove that the equity calculation for the proposed distribution applies to the Bankruptcy Code by obtaining a formal appraisal of the property. Both Chapter 7 and Chapter 13 are designed to provide debtors a “fresh start” and fairly treat creditor interests. The determination of equity in a marital home or investment property prior to filing is critical to determining the proper chapter selected. Debtors must be aware that the trustees have an independent fiduciary duty to challenge that value in exercise of their business judgment.
In certain cases, debtors can enlist the help of friends or relatives to make a lump sum payment to a Chapter 7 trustee to resolve the issue of the amount of equity in their property. In cases where debtors have accumulated substantial non-exempt assets in IRAs and 401(k)s that are not property of the bankruptcy estate and do not affect a potential distribution to creditors, it may be advisable to take a hardship withdrawal if the client’s goal is to remain in the residence.