Chapter 7 bankruptcy is the fastest solution for major financial challenges, but there are several obstacles. Filers have to prove that they qualify by passing a means test. They may also need to sell or liquidate some of their property to pay creditors before they are eligible for a discharge. The asset liquidation requirement is often the biggest deterrent to prospective Chapter 7 filers. They do not want to lose their most valuable resources.
Homeowners may feel particularly nervous about Chapter 7 proceedings. Can filers protect some of their home equity in a Chapter 7 bankruptcy case?
Exemptions can protect home equity
Chapter 7 would not be a particularly useful option if everyone who filed had to sacrifice all of their resources to qualify. There are exemptions available during Chapter 7 bankruptcy that can help filers protect critical assets such as vehicles, retirement savings and accumulated home equity.
Currently, those filing Chapter 7 bankruptcy in Washington as individuals can protect up to $125,000 in equity using state exemptions. Couples filing jointly can exempt up to $250,000 in accumulated equity. The state exemption is substantially higher than the federal exemption, which protects up to $31,575 in equity for an individual and double that amount for a couple.
For those with a substantial amount of home equity accumulated, Washington state exemptions may be better than federal exemptions. In some cases, those with more equity than they can exempt may need to consider a different approach, such as a Chapter 13 filing.
Learning more about the unique laws that govern Chapter 7 bankruptcy proceedings can be beneficial for those seeking a fresh financial start. The proper use of exemptions can help people pursue bankruptcy without sacrificing their homeownership and risking other critical resources.