While there is nothing wrong, per se, with filing for bankruptcy under Chapter 7 in Massachusetts, there are times when filing bankruptcy under chapter 7 does not make sense. Recall from previous articles, that Chapter 7 bankruptcy is the liquidation chapter. Basically, in most cases in chapter 7, the debtor’s assets are liquidated to pay off secured creditors and a large swath of unsecured debt is discharged. Compare chapter 7 to chapter 13 in which the debtor ideally gets to keep more of his or her property for the trade off of having to pay back most creditors over an extended period of time in a repayment plan.
One particular type of debtor can be a bad fit for the choice of chapter 7 bankruptcy, namely, a debtor that owns a significant amount of equity in real property (real estate). The problem that arises for a such a debtor, particularly one without a homestead exemption, can be that the equity in the home becomes part of the bankruptcy estate and does not fit or is not part of any exemption. Once part of the bankruptcy estate, that equity can be used by a bankruptcy trustee in a Massachusetts court to pay off debts. So, if the equity in the home is significant and secured debts also exist, it is possible that the bankruptcy trustee will use the equity to force the sale of the home to pay back debts owed to secured creditors. In plain English, if you have a lot of equity in your home, and if you file under Chapter 7 bankruptcy, you might be forced to sell your home to cover your debts.
The good news is that there are times when a properly filed homestead exemption may be used to protect equity in a primary residence, up to $500,000. If a homestead exemption has been properly filed and the debtor is current on all mortgage payments and able to continue to make mortgage payments even after filing for bankruptcy, it is possible that Chapter 7 might be a viable option to consider if still needing to file bankruptcy.
There are Other Exemptions in Addition to the Homestead Exemption
Even when a homestead exemption has not been filed, or cannot be filed, in Massachusetts there exists an automatic homestead exemption of $125,000. This means that $125,000 of home equity may be exempt from consideration by a bankruptcy trustee in a Massachusetts court as a means to payoff debt. In addition to the above exemptions associated with homestead filings as they relate to bankruptcy, there exist certain protections for elderly or disabled persons in Massachusetts that may be able to exempt some equity if a bankruptcy petition was filed under Chapter 7 or 13.
Still, and this is the overarching point of this article, it may be safer to avoid filing under Chapter 7 bankruptcy in Massachusetts if you own a home with significant equity and that equity cannot be protected by an exemption. Under this set of circumstances, filing under Chapter 13 is often the best option.
“But, I don’t’ have Equity in my Home”
On the other hand, if you don’t possess equity in your home, and you don’t intend to keep your home, Chapter 7 may be a viable option as there will be no equity for the bankruptcy trustee to reach, from the home at least, to satisfy secured debt or other obligations.
It ought to be clear from this article that there are many fine aspects of bankruptcy that make navigating choices such as which bankruptcy chapter to choose, or which exemption scheme (state or federal) to choose, complex. Consult with an experienced attorney to get the best direction when filing for bankruptcy in Massachusetts.
Find out more about bankruptcy by reading articles I’ve written on the subject here:
Bankruptcy and Credit
Is Bankruptcy the Best Choice for a Massachusetts Resident?
Property Exempt in Bankruptcy
Before Filing For Bankruptcy – Foreclosure Basics
Chapter 13 Explained
Chapter 7 Explained
How Debt is Handled in Bankruptcy in Massachusetts
Will I lose my Car When I File for Bankruptcy?
Massachusetts Bankruptcy FAQ’s
Consolidate Debt or Declare Bankruptcy in Massachusetts?
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