How to Value Your Home in Bankruptcy

Having an accurate valuation of your house will help you decide whether you can protect your home when filing for bankruptcy. Here's how to value your home for bankruptcy purposes.

Protecting Your Home in Bankruptcy

Almost all states let residents who file for bankruptcy protect some amount of equity using a homestead exemption. However, the extent of that protection varies.

In some states, such as Florida, the entire homestead is protected regardless of value. Iowa and Texas have liberal exemption statutes, as well. By contrast, in other states, such as Kentucky, the homestead protection can be as little as $5,000. Alabama's homestead exemption is $15,000 (as of September 2017—these amounts change periodically).

(Find out more in Bankruptcy Exemptions by State.)

Why Home Value Matters

To determine whether you'll be able to protect your home, you'll need an accurate home valuation. Next, you'll deduct the mortgage balance and determine the equity. If the equity is less than the amount of the homestead protection available, your house will be protected in bankruptcy.

When you can't protect all of your equity, what happens next depends on the bankruptcy chapter you file:

• Chapter 7 bankruptcy. If the equity exceeds the available homestead protection, your house may be at risk in a Chapter 7 bankruptcy. The bankruptcy trustee would sell it, pay off the mortgage, give you your exempt equity, and distribute the remainder to creditors.
• Chapter 13 bankruptcy. You could keep your house by filing for Chapter 13 bankruptcy; however, you'd have to pay at least an amount equal to the nonexempt equity through a three- to five-year repayment plan. Many people with a substantial amount of nonexempt equity have a difficult time demonstrating that they have enough income to make the required monthly Chapter 13 bankruptcy payment.

(To learn more, see Your Home and Mortgage in Chapter 13 Bankruptcy and Your Home in Chapter 7 Bankruptcy.)

How to Value Your Home

When you fill out the bankruptcy forms, you'll be asked to provide the "current value" of your home on the date that you file for bankruptcy. Another term for current value is "fair market value," which is the amount that a seller who isn't pressured to make a purchase would agree to pay for the home.

You can use different ways to determine the value of your home before you file for bankruptcy. The most important thing to keep in mind, however, is that your valuation isn't the deciding factor. The bankruptcy trustee appointed to oversee your case will also be determining the value of your home, as well. If there's a disagreement, a bankruptcy judge will review the basis for both valuations and make a final decision.

Full House Appraisal

A full appraisal will give you the most accurate value for your property. If you refinanced your home or modified your loan, you might have a recent appraisal. What is considered a recent appraisal will depend on current housing climate.

To get a full appraisal, you hire a licensed real estate appraiser who inspects your property and prepares a lengthy report, containing information on your home and information on sales of comparable homes. Based on that information and any other factors the appraiser finds necessary, the appraiser will set a value and explain the valuation.

A full appraisal is the most expensive option. It isn't needed in most routine bankruptcy cases. They are necessary, however, if you plan to try to strip the second mortgage on your property in a Chapter 13 bankruptcy. (See Getting Rid of Second Mortgages in Chapter 13.)

Comparable Market Analysis

This is less expensive than a full appraisal and might provide you with an accurate home valuation when preparing your bankruptcy paperwork. Under this option, a licensed realtor will compare your house to other homes sold in your area. A market analysis will use data from the sales of homes that are located close to yours and are similar in size, style, and condition.

Real Estate Websites

These might be useful if you have a high mortgage amount and you believe that the homestead protection to you will be more than sufficient to protect your property. The information you can obtain might provide you with confirmation of your understanding of your home's value. If not, you can get a more formal valuation, if necessary.

Realtor.com and Trulia.com are two places to start. Your local trustee will likely prefer a particular site (and view others with more skepticism). It might be useful to contact the local branch of the U.S. Trustee's office for clarification.

Valuation Methods Not to Use

There are some valuation methods which are not reliable for bankruptcy purposes and should not be used.

Property Tax Appraiser Values

Your locality may have a property tax appraiser that values your property for real estate tax purposes. These valuations are rarely utilized in a bankruptcy proceeding. The property tax appraiser will often use methods that are not acceptable appraisal methods for sale purposes and often the value is not an accurate representation of the market value of the home.

Quick Sale Values

This valuation method which produces a lower value based on a need to dispose of property quickly is not readily applicable to real estate. A bankruptcy trustee will sell a house the same way a homeowner would—by hiring a real estate broker to market the property. As a result, a "quick sale" value is not helpful to you when you are considering bankruptcy. Also, if you rely on an artificially deflated value, you might incorrectly assume you can keep your home. It's important to get it right because many Chapter 7 bankruptcy judges won't let you dismiss your case just because it turns out that you'll lose property that you thought you'd be able to keep.