Too Much Equity in a Home Can Make Chapter 13 Impossible
Having too much equity in your home can prevent you from safely filing Chapter 7. When this happens, Chapter 13 is always available to file to allow you to keep your home. Sometimes the numbers do not “add up” however. This creates a situation where too much equity in a home can make Chapter 13 impossible. The payment required can be very large, becoming impossible to pay with some budgets.
The Best Interest Test for Creditors (BIT)
Too much house equity can make Chapter 13 impossible. This happens when you have large amounts of equity or have a paid-in-full-house. States like Indiana for instance only allow you to keep $22,750 in equity in a home per each person. If you had $100,000 in equity or value, you would be $77,250 over in a basic example. Using this example, the Best Interest Test for Creditors (also called “BIT) can be explained. You see, according to the “BIT’ requirement, you must pay back $77,250 to unsecured creditors alone in the above example. This would result in a $1475 payment for this requirement alone. After more requirements, the payment could be even much higher.
The Best Interest Test can also be described as a “fairness test.” This fairness test says that creditors must receive no less than what they would have received out of a Chapter 7. The trustee could have sold a house in a Chapter 7 to pay back some debts if it went over the exemption. This would have given each creditor some of their money back. The court will require the same amount to be received by each creditor during the Chapter 13 plan.
https://www.justia.com/bankruptcy/chapter-13/best-effort-requirement-in-chapter-13/
How Too Much Equity in a House Causes Impossible Chapter 13 Payments
Too much equity in your house can frequently cause very high Chapter 13 payments like the earlier example. This is a common situation where required Chapter 13 payments make the case simply impossible. This can be a dead-end situation when it comes to immediate bankruptcy relief. You cannot file Chapter 7 because of too much equity. You can file a Chapter 13, but the payment will be simply too high to pay. This high-payment problem happens usually only in two situations. The first is where there is a very limited budget. Very low income in a household can make even the smallest of Chapter 13 required payments impossible. The second situation is where the debtor has a large amount of debt and also a large amount of equity. Having both at the same time is the problem. Even a high earner may not be able to pay a large payment like $6,000 or $7,000 that is based on only high debt and large equity numbers. Both of these examples may create a “dead-end” bankruptcy situation.
Another Example of Going Over Exemption Amounts
Remember, any amount that you were over your “exemptions” you must pay back to unsecured creditors in Chapter 13. Once again, exemptions are those amounts that limit how much property values you are allowed to keep. If you go over them, the required Chapter 13 payment will increase. For instance, in Indiana the current residence exemption once again is about $22,750 per person. Take a person that had $200,000 of equity in their house, and also had $230,000 of unsecured debt. Subtract the exemption from the $200,000. You would have to pay $177,250 to unsecured creditors within the 5 year plan. This would result in a payment of $3350 or more to pay all required creditors. This could simply be impossible for some budgets to pay each month. There is no way out of it: Chapter 13 requires this type of payment. If you add required tax debt payments or other required payments, the amount could rise to requiring $6,000 or $7,000 per month or more. The court may look at a budget on these high payment cases. The court uses the word “infeasible” to describe a plan that looks too hard to pay. The court is simply saying it looks like there is not enough money to fund the required monthly payment. In simpler terms, the case seems close to impossible to be successful with a look at the budget.
https://bymasterbankruptcy.com/2021/11/how-to-use-indiana-bankruptcy-exemptions/
Too Much Equity Can Create a “Dead-End” in Bankruptcy
In conclusion, it can be easy to see how too much equity coupled with large debts can create a “dead end” in bankruptcy. It can stop a person from filing Chapter 7. Then, the required payment in Chapter 13 can simply be too hard to handle. In these situations, more advanced bankruptcy or debt relief planning may be required. These options can sometimes take time, even years to complete. These options can range from selling a property, restructuring debt, or even taking more radical action to deal with difficult debt problems. These types of options should be discussed with an experienced bankruptcy attorney.
