Most individuals considering bankruptcy will either file for Chapter 7 or Chapter 13 bankruptcy. Those with income low enough to pass the Tennessee means test given their household size may consider Chapter 7 proceedings because they are fast and relatively effective at eliminating unsecured debt.
However, people call Chapter 7 bankruptcy liquidation proceedings for a reason. The trustee appointed by the courts to oversee your case will need to review your financial circumstances and sell off or liquidate some of your property. Your home equity is among the numerous assets potentially at risk in a Chapter 7 bankruptcy in Tennessee.
Can you protect your home equity while still getting a Chapter 7 discharge?
Tennessee does provide homestead exemptions
Like other states and the federal government, Tennessee has specific bankruptcy exemptions included in state law. Unfortunately, Tennessee law specifically prohibits those filing for bankruptcy from utilizing federal exemptions. You can use the federal non-bankruptcy exemptions to protect your wages and certain benefits, but not your home.
State exemptions are the only way to protect your home equity, and your family circumstances will determine how much you can exempt. If you file as an individual and you do not have children living with you, you may only be able to protect $5,000 worth of equity in your home. That might be less than what you provided as a down payment, to say nothing of the equity you have accrued over years of making payments while living at the home.
If you have a child living with you, you can protect up to $25,000 worth of equity. Married couples who file jointly can protect up to $25,000 in home equity depending on their age. Individuals over the age of 62 can also potentially protect up to $12,500 worth of home equity instead of just $5,000. Any Equity above that exemption threshold will be subject to liquidation. You may have to refinance your home so that you can use the equity in it to repay some of your unsecured debt before your discharge.
What if you’re home equity is worth far more?
Even if you passed the means test for Chapter 7 proceedings, you may need to consider Chapter 13 bankruptcy if you have tens of thousands of dollars and home equity at risk in a Chapter 7 filing. While you will have to make several years’ worth of structured payments in a Chapter 13 bankruptcy, you won’t have to liquidate your assets or home equity.
Careful review of your financial circumstances will play a major role in the early stages of bankruptcy. Learning more about the different types of bankruptcy can help you choose a solution that will work for your current situation.