May 14th, 2013

Homestead Problem: If it Appreciates During Your Chapter 7, You Could Lose It!

A common misunderstanding that an Arizona bankruptcy lawyer has to remind clients is that your Chapter 7 bankruptcy case can stay open as long as the trustee desires, even after you get your discharge. Assuming everything goes as planned, you will get your Chapter 7 bankruptcy discharge 4 – 5 months after you file. But your case is over only when the trustee closes the case.

As I have written before, most of the property you own is exempt property that you are allowed to keep in bankruptcy. But to the extent you have non-exempt property, the trustee can require you to turn it over at any time after the case is filed and before the case is closed. To complicate matters further, if you had exempt property below the exemption amount at the time you filed your case, but it appreciates in value above the allowed exemption amount (even after you received your discharge), the trustee can then require you to turn it over so long as the case is still open.

For example, assume you listed a free and clear homestead on your bankruptcy paperwork valued at $120,000. In Arizona, your homestead is exempt, provided it has $150,000 of equity or less. At the time you filed, it was worth $120,000, so you think you are safe because it is below the $150,000 amount. But now assume the trustee keeps your case open for 2 years and your home suddenly appreciates to $200,000 during this time. Now it’s worth an additional $50,000 above the $150,000 homestead exemption amount. The trustee can now force a sale of your home because it has appreciated above the allowed $150,000 exemption amount.  If the home is sold, the trustee will be required to pay the debtor the $150,000 maximum exemption amount from any sale proceeds and keep anything above such amount.

This unfortunate scenario is going to start happening more and more because the Arizona real estate market is rapidly appreciating. An Arizona bankruptcy lawyer can file the appropriate documents to prevent this from happening. A debtor will pay thousands of dollars to try to fix what could have easily been avoided if the debtor had chosen competent counsel. And remember:  once you file Chapter 7, you can’t get out. You can only fix these kinds of mistakes before you file.

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