People don’t plan on filing for bankruptcy, but situations can arise where it becomes the best option. When finances get tight because of increasing debt obligations or a reduction in your income that makes previously manageable debt impossible to pay, homeowners often have to make difficult decisions. Some people might consider borrowing their home equity to repay some of their creditors.
However, arranging partial repayment by diminishing the equity in your home may not be the best solution, particularly because you can exempt a small amount of home equity in Chapter 7 bankruptcy proceedings. In Chapter 13 bankruptcy, you can likely protect all of the established equity in your home.
Before you reduce the equity in your home without truly solving your debt issues, it makes sense to learn more about how bankruptcy could help you regain control of your financial circumstances.
Kentucky has Strict Equity Exemptions but Allows the Use of Federal Exemptions
The amount of home equity a person can protect from liquidation during bankruptcy varies drastically from state to state. Kentucky is one of the less forgiving states, allowing for only $5,000 in home equity to receive protection in the event of Chapter 7 bankruptcy filings.
However, Kentucky does allow those filing bankruptcy to elect to use the federal standard bankruptcy exemptions instead. The current federal exemption for your primary residence or homestead is $25,150. Using the federal standard exemptions allow you to protect more than five times the amount of home equity, which may be beneficial for individuals with substantial unsecured debt who are able to pass the means test.
If your total home equity is under the federal exemption amount, Chapter 7 proceedings could allow you to discharge your unsecured debt obligations while simultaneously protecting the equity you have accumulated in your home. Bankruptcy could help you stop foreclosure and free up more of your income to pay your living expenses instead of your debts.
Chapter 13 is Better for Those With Significant Equity
For those with income over the state median who cannot pass the means test, Chapter 7 bankruptcy may not be an option. Even if your income alone qualifies you for Chapter 7 proceedings, that may not be the best option if you have $30,000 or more in home equity, as you will lose a substantial amount of your home equity in the process.
Chapter 13 proceedings may allow you the same discharge opportunities after a repayment plan while also protecting the total amount of equity you already have in your home. Not only can you stop creditor collection activity and reduce your total debt, but you can also potentially renegotiate existing debts you intend to maintain, such as your mortgage and car loan, as part of Chapter 13 proceedings.