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Three-year descent of real estate prices at an end

The New York Times reported on Wednesday that the 3 year decent in home prices appears at an end. The Philadelphia Inquirer reported pretty much the same story that day. Today it was reported that foreclosures are on the rise in areas that were previously unaffected by the housing industry decline, and that this is due to declining employment, rather than trouble loans. This all has implications for people considering bankruptcy to protect their homes.

There are two basic economic tests to protect your house in a bankruptcy case. The first is household income. If your income is above a threshold, called the means test, then you must file a chapter 13 bankruptcy. The second is non-exempt equity. If your equity in your house is above the limit you are allowed to protect from your creditor’s, called the real property exemption, you have to file a chapter 13 plan. There are other considerations, but these are the two economic thresholds. Stated differently, if either your household income or non-exempt equity is too high, you must file a chapter 13 case. If you pass both tests, meaning that neither exceeds the limits, then you can file a chapter 7, which is cheaper, quicker and in many ways simpler and easier for the debtor. (You can still keep your home if you’re up to date).

So, if we’re at the bottom of the decline in housing price decline, that means that your equity is at a low point. If you house was worth $250,000 3 years ago and you had a $175,000 mortgage, you had $75,000 in equity. The federal exemptions allow a married couple to protect $40,400.00 in equity, so three years ago you had $34,600 in excess (non-exempt) equity, meaning a couple would have to file a chapter 13 case to protect the home. Now, if the housing market has declined 25%, the home is worth $187,500. With the same $175,000 mortgage (give or take a little due to 3 years worth of payments) the equity is $12,500, well within the Federal limits, so the couple can file a chapter 7 case, provided their income is also below the means test threshold. Similarly, if the household income has declined due to downsizing, layoffs, and a cutback in overtime or other reasons, the couple who once exceeded the income means test may now be able to file a chapter 7, provided their non-exempt equity is below the exemption limit.

Bankruptcy is never a first option, but for some people facing a difficult time, now might be the ideal time to get their finances in order. If they wait until things turn around, and their income and equity increases, they could actually forego an option if forced later to file a bankruptcy case.