Bankruptcy Valuation and Equity

Equity is one of the most important terms when it comes to your bankruptcy case. When determining whether you can keep property in Chapter 7 bankruptcy, your lawyer will often look to the amount of equity. Too much and you could lose it, so you can see why it’s so important.

Put simply, equity is merely the difference between the market value of something and the claims held against it. But that presents a whole new set of questions, doesn’t it?

Market value is the first part of the bankruptcy equity analysis. This is the amount you could sell that particular piece of property for, given the current condition of the item. In other words, take a look at that pair of shoes you’re wearing – how much would you get for them if you took them off your feet and tried to sell them?

That’s market value. And for things like clothing and your household goods, the value is pretty small. After all, who’s going to give you money for your 8 year old sheet set? If it’s the bankruptcy trustee, the answer is pretty much zero.

But market value goes somewhat deeper. If you’ve got a home worth $800,000 the market value isn’t $800,000 because that’s not how much you’d be left with if you sold it. You’d have to pay a real estate broker, state and (if you’re in New York City) city transfer taxes, and maybe money to the co-op or condominium association. Those costs all go to reduce the market value of the home.

Now let’s look at the, “claims held against it,” part. We’re talking about secured debts here. If you own a car and there’s a loan of $14,000 against it, that’s a claim against the car. Simple, right?

It can get tougher, though. You’ve got a home you own, and there’s a $280,000 mortgage against it. But there’s also $4,500 in unpaid property taxes and $5,000 in unpaid common charges due to the condominium association. You also have a judgment against you for $20,000.

These are all claims against your home. Yes, even the judgment. Because in New York, a judgment attaches to all property – including your home.

So the upshot is that when determining equity, you need to take the market value (sale price less any costs of selling the property) and then take away the total of the claims against the property. When you’ve got that number, you know your equity for the purposes of the bankruptcy case.

Photo courtesy of Sappymoosetree.