When Your Homestead Equity Increases While in Chapter 7

Assuming everything goes as planned, you will get your Chapter 7 bankruptcy discharge approximately three to four months after you file. A common misunderstanding is that a case is over once the debtor receives a Chapter 7 bankruptcy discharge. A trustee has many reasons to keep the case open long after the discharge. This is especially true if there are assets in the case, such as an upcoming tax refund. I always tell my clients that if there are assets in the case, the trustee will most likely keep it open for at least 12 months, if not longer. The truth is the trustee can keep the case open as long as they want. Your homestead is usually exempt when you file Chapter 7 bankruptcy. However, if homestead equity increases above the exemption maximum while your case remains opens, you could lose it.

What if the homestead equity increases above the exemption amount while the case is open?

As I have written before, most of the property you own is exempt property you can 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 you file the case and before the case is closed. To complicate matters further, assume you had exempt property below the exemption amount at the time you filed your case. If it appreciates above the allowed exemption amount while the case is open (even after you received your discharge), the trustee can require you to turn it over.

For example, assume you listed a homestead on your bankruptcy paperwork with $375,000 of equity when you filed your case. Equity is what the property is worth minus the total amount you owe on any mortgages and other liens (such as HELOCs, HOA liens, etc.). In Arizona, your homestead is exempt, provided it has $400,000 of equity or less. The voters increased the homestead amount from $250,000 to $400,000 by passing Proposition 209 in November 2022. As of December 2023, Attorneys and creditors are challenging Proposition 209 in the Court of Appeals. For purposes of this article, assume the debtor filed Chapter 7 at the $400,000 homestead is applicable. At the time you filed, it was worth $375,000, so you think you are safe because it is below the $400,000 exemption amount.

But now assume the trustee keeps your case open for two years and your homestead equity increases and appreciates such that it has $450,000 of equity. Now it has $50,000 of equity above the $400,000 homestead exemption amount. Your homestead is usually exempt when you file Chapter 7 bankruptcy. The trustee can now force a sale of your home if the homestead equity increases above the allowed $400,000 exemption amount. If the trustee sells the home, the debtor will receive the $400,000 exemption amount. The trustee will keep the rest to pay to the debtor’s creditors.

A competent Arizona bankruptcy attorney can solve this avoidable problem.

If the homestead equity increases above the applicable exemption while the case is open, you could lose it. This unfortunate scenario is especially true in Arizona because the real estate market is rapidly appreciating.

But there is good news! A competent Arizona bankruptcy lawyer can file the appropriate documents to “abandon” the homestead before it appreciates. I tell my clients that although you have to list your homestead in your Schedules, you can “take it out of the bankruptcy” after the case is filed under certain circumstances. If your case is going to remain open, it is critical that this be done as soon as possible. A competent bankruptcy lawyer can determine whether this is a risk. Abandoning the homestead would allow the debtor to keep the appreciation and avoid losing the house. It may cost the debtor an additional legal fee. However, that is a drop in the bucket compared to losing the house and its additional equity. And remember: once you file Chapter 7, you can’t get out. You must have a competent lawyer to prevent the risk before the problem comes to fruition.