What Is Equity and How Does It Affect Your Bankruptcy?

When you have a loan on property, you’ll hear the word “equity.” Equity is how much of the property’s dollar value belongs to you. The lienholder owns the rest. Finding your equity is simple. Take the current value of your property and subtract outstanding loans.

Here’s an example to make it clear. You own a home with a current market value of $200,000. The balance on your only mortgage is $175,000. You have $25,000 of equity in your home.

$200,000 (value of house) – $175,000 (balance left on mortgage) = $25,000 (your equity)

You can have equity in your car too. Cars usually decrease in value, so equity is less common. But the calculation stays the same. You own a car worth $7,000 and owe $3,100 on the loan. Your equity is $3,900.

Why Does Equity Matter in Bankruptcy?

When you file bankruptcy, exemptions protect the equity you have in certain assets. Your house or car can be 100% protected even when it’s worth more than the available exemption. The key is keeping your equity below the exemption amount.

Here are some examples showing how equity protection works:

Example 1: Home With High Value, Low Equity

Your home is worth $300,000. You owe $280,000 on your mortgage. Your equity is $20,000. Your state exemption is $25,000. Result: Your home is fully protected.

Example 2: Car With Negative Equity

Your car is worth $8,000. You owe $10,000 on the loan. You have no equity. The trustee won’t take your car. You’re underwater on the loan.

Example 3: Home With High Equity

Your home is worth $250,000. You owe $150,000 on your mortgage. Your equity is $100,000. Your state exemption is $50,000. Result: You have $50,000 of unprotected equity. The trustee may sell your home.

How the Bankruptcy Trustee Views Equity

In Chapter 7 bankruptcy, the trustee can sell your assets. The proceeds pay some of your debts. When loans exist against sold property, the trustee must pay those off first.

Without equity in the property, nothing remains after paying off loans. Selling that property isn’t worth the trustee’s time and expense. The same applies when exemption laws protect all or most of your equity.

If your house or car is worth less than what you owe, you have no equity. The trustee won’t be interested in the asset. You keep the property as long as you continue making payments.

Understanding Secured Debt and Equity

Secured debt means the lender has a lien on your property. The lien gives them rights to the property if you stop paying. Your equity represents your ownership stake after accounting for these liens.

Multiple liens can exist on one property. You must subtract all outstanding loan balances to calculate true equity. A second mortgage or home equity line reduces your actual equity further.

Building Equity Over Time

You build equity two ways: paying down debt and property appreciation. Each mortgage payment chips away at the principal balance. Your equity grows with each payment.

Property values can increase over time. Market appreciation adds to your equity without additional payments. You can’t control market conditions, but you control your payment schedule.

Protecting Your Equity in Bankruptcy

Bankruptcy exemptions vary by state. Some states offer generous homestead exemptions protecting substantial equity. Other states provide minimal protection.

You need to know your state’s exemption amounts before filing. A bankruptcy attorney can explain which exemptions apply to you. Proper planning helps you keep more of your assets.

Chapter 13 bankruptcy offers different protections. You don’t lose assets with unprotected equity in Chapter 13. Instead, you pay the value of unprotected equity through your repayment plan.

When Negative Equity Helps You

Owing more than your property is worth creates negative equity. You’re “upside down” on the loan. Negative equity isn’t ideal for your finances. But it protects assets during Chapter 7 bankruptcy.

The trustee won’t sell property with negative equity. No proceeds would remain for creditors after paying off the loan. You keep the property by continuing payments to the lender.

Calculating Equity Accurately

Use current market values when calculating equity. Don’t rely on purchase price or tax assessments. Property values change constantly.

Check recent comparable sales in your area for homes. Use Kelley Blue Book or similar resources for vehicle values. Conservative estimates help avoid surprises during bankruptcy.

The bankruptcy trustee may order professional appraisals. Trustees want accurate values to determine if selling assets makes sense. Honest valuations from the start prevent complications later.