Equity And Why It’s Important
Equity is one of the most important terms when it comes to your bankruptcy case. When determining whether you can keep property in Chapter 7 bankruptcy or how much you will need to pay to unsecured creditors in a Chapter 13, your lawyer will often look to the amount of equity. Too much and you could lose the property in a Chapter 7 or too much and you may have to pay a significant amount towards unsecured debt in order to keep it, so you can see why it is so important.
Put simply, equity is merely the difference between the market value of something and the claims held against it. But that presents a whole new set of questions, doesn’t it?
Market value is the first part of the bankruptcy equity analysis. This is the amount you could sell a particular piece of property for, given the current condition of the item. In other words, take a look at that pair of shoes you are wearing; how much would you get for them if you took them off your feet and tried to sell them? That is market value. And for things like clothing and your household goods, the value is pretty small. After all, what is your 4 year old set of bed sheets worth? The answer is basically zero.
But market value goes somewhat deeper. Now let’s look at equity in vehicles. If you own a car worth $20,000 and there is a loan of $15,000 against it, then there is a claim against the car and your equity is only $5,000.
If you have a home worth $100,000, the equity is not $100,000 because that is not how much you would be left with if you sold it. You would have to pay a real estate broker, closing costs and what you owe the mortgage company. Those costs all go to reduce the equity of the home. So the upshot is that when determining equity, you need to take the market value (sale price less any costs of selling the property) and then take away the total of the claims or debts against the property.
When you have that number, you know your equity for the purposes of the bankruptcy case. Then your attorney will look at the exemptions available to you under your state’s bankruptcy law to ensure that the amount of equity you have (now that you’ve calculated it) will be protected. For example, Mississippi Exemptions allow for $10,000 of equity in household goods for an individual filing bankruptcy ($20,000 for a couple). If you have more equity than what an exemption will protect – your attorney will discuss all the options available to you for you to decide what is best for you.
Key thing to keep in mind – there are options. It’s imperative that you find an work with an experienced bankruptcy attorney (not a jack of all trades) regarding these matters to ensure you come through protected and with your fresh start in tact.