Can I Keep a Second Home in Chapter 7 Bankruptcy?

In most cases, if you have equity in a second home, vacation home, or house you use as an investment, you won't be able to keep it if you file for Chapter 7 bankruptcy. In essence, whether you can keep your second or vacation home in Chapter 7 bankruptcy depends on how much equity you have in the house, what bankruptcy exemptions are available, and whether your dependents use the house as a residence.

Why Most People Can't Keep a Second Home in Chapter 7 Bankruptcy

Nothing within the bankruptcy laws strictly forbids you from keeping a second home in Chapter 7 bankruptcy. However, because states do not have specific exemptions or laws that allow you to protect a home that is not your residence or your dependents' residence, most people must turn the home over to the bankruptcy trustee.

Learn about the requirements to keep a home in Chapter 7 bankruptcy.

You Don't Lose All Property in Chapter 7 Bankruptcy

In Chapter 7, the bankruptcy trustee can sell property you own to pay your creditors. However, because bankruptcy laws are created around the idea of a fresh start, you are not expected to give up everything you own. You can protect much of your property through the use of exemptions.

How Do Bankruptcy Exemptions Protect Your Property?

Bankruptcy exemptions vary by state and in the equity they allow you to protect. But generally, they allow you to keep a certain amount of equity in property like your residence, automobiles, and household goods.

Some states, for example, allow you to protect hundreds of thousands of dollars of equity in your home, while other states limit you to ten or twenty thousand dollars. Learn more about bankruptcy exemptions and find the exemptions available in your state.

What Happens If The Chapter 7 Trustee Sells Your Property

If the trustee sells your property, he or she must pay you the exemption amount out of the sale proceeds. The trustee will also take his or her commission from the sale proceeds, pay off any liens or loans secured by the property, and then distribute the rest to your creditors. If all of your equity in an item of property is protected by exemptions, the trustee won't have any interest in selling it and you get to keep it.

Example 1. Say you own a car worth $5,000, you don't have a car loan, and your state has an automobile exemption in the amount of $5,000. If the trustee were to sell your car and pay you the $5,000 exemption amount, nothing would be left for your creditors. In this situation, you'd get to keep your car.

Example 2. Suppose in the above example you still live in a state allowing a $5,000 exemption in an automobile, but your car is worth $12,000. In this scenario, the bankruptcy trustee would sell your car, pay you $5,000, use the remaining $7,000 to pay for the costs associated with the sale and the trustee's commission, and then distribute the remainder to your creditors.

How Much Equity Do You Have in the Second Home?

The trustee will determine whether or not you have sufficient equity in your second home to make it worthwhile to sell for the benefit of your creditors. This requires answering two questions:

• How much is the home worth?
• How much equity do you have in the home?

Valuing Your Second Home

With real estate and all other property, you must report your property's worth to the trustee. Recent appraisals, comparative sales analyses, or a local real estate agent's opinion may help you value your second home.

Be prepared to explain to the trustee how you arrived at the value you report, and know that the trustee could want to independently determine the estimated value of the property.

Learn more about how to value your home in bankruptcy.

Figuring Out How Much Equity You Have In Your Vacation Home

To calculate your equity in your second home, start with the home's value and subtract the balance of loans or liens secured by the property. This includes mortgages, home equity loans or lines of credit, tax liens, and judgment liens. The trustee must pay these off before distributing funds to your creditors.

Example. Your home is worth $250,000. You have a mortgage on the home with a balance of $100,000. Your equity in the home is $150,000.

If the trustee determines that there is equity in your second home, he or she will consider whether it makes sense to sell the property. To make it worth the effort, there must be sufficient funds to pay creditors after:

• deducting the costs associated with selling the property
• taking his or her commission
• paying you your exemption, and
• paying off any liens against the property.

If, after all of these things are paid, the trustee predicts that there will be significant funds to distribute to the creditors, the trustee will likely sell your vacation home.

Which Exemptions Can I Use on a Second Home?

The homestead exemption is often very generous, but unfortunately you can only use it to protect real property you use as a residence for yourself or your dependents. You cannot apply the homestead exemption to homes used as rental or vacation homes, or simply kept as family or investment property.

The Wildcard Exemption

In most states, the only exemption available for second homes is the ‘wildcard' exemption. However, not all states have a wildcard exemption and usually, the wildcard exemption is less than a couple thousand dollars per individual.

In some states, you can use it to protect any type of property. In others, you can only use it to protect specific types of property only, and real estate is often not included.

The Homestead Exemption for Homes Where Your Dependents Live

If you happen to own a second home that is used as the residence of your dependents, you may be able to use the homestead exemption as long as you do not need that exemption to protect your residence. This situation sometimes arises when you own a second home in which your ex-spouse and children live. Assuming these children are still your dependents, you might be able to use the homestead exemption to protect this home.

Consider Filing for Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, filers aren't required to give up property and can keep a second home. Filers can also reduce the amount owed on the mortgage to the home's value. However, keeping a second home in Chapter 13 can be challenging.

You'll pay the equivalent of the home's nonexempt equity to creditors through the plan. Additionally, if you reduce the mortgage through a cramdown, you must pay the entire reduced amount within the Chapter 13 plan timeframe, which would typically be five years.

Learn about protecting homes in Chapter 13 bankruptcy.