It’s not unheard of for debtors filing New York bankruptcy to own property that can’t be fully protected by an exemption. Although the state’s homestead exemption is quite generous compared to the federal exemptions, it might not cover all equity in a property. Alternatively, debtors might be concerned with equity in non-real estate property, or they may be electing to use the federal exemptions, leaving much home equity exposed.
So how can a debtor deal with the problem of excess equity in property? There are three ways.
(1) Use wild-card exemptions. The federal exemptions give debtors a minimum $1,225 to apply to any property, and if they don’t take the homestead exemption, they can use $11,500 for any property. Under the New York rules, debtors who don’t use the homestead exemption receive the lesser of $5,525 or $11,025 minus their other exemptions, plus $1,100 in a wild-card exemption. Debtors can apply all of these to property with excess equity.
(2) Sell the property. This option is obviously not going to be palpable for many debtors—they’re interested in keeping their property through bankruptcy. However, selling property has its advantages. For one, the property might be lost soon anyway, e.g. through foreclosure, so selling it, even via short-sale, can resolve the problem. Secondly, debtors can apply exemptions to any net cash produced from the sale to protect other types of property.
(3) Attach a lien to the property. This strategy may seem bizarre: Going deeper into debt to get out of debt and keep property, but it can work, especially when used with automobiles. The debtor borrows against the equity in the property, and then uses exemptions to keep the net cash from the trustee. This strategy often involves signing a reaffirmation agreement with the new creditor. In fact, debtors are free to borrow the money to dissipate the equity in a piece of property from anyone, including relatives.
It should be clear here that most of the trick to keeping excess equity from the trustee is redistributing its value to other assets via exemptions. Otherwise, debtors would just sell their assets, repay the creditors, and not bother with the bankruptcy system. If your situation is more complex than this, then you’ll want to discuss it with an experienced New York bankruptcy lawyer to carefully explore your options.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.