If the equity in your home exceeds the exemption limit in Colorado, you may be at risk of losing your home by filing a chapter 7 (liquidation). In such cases, I recommend filing a chapter 13 (reorganization/non-liquidation). In most cases, the equity in a home is not sufficient to impact your monthly chapter 13 plan payment. However, there is a rule that must be followed in chapter 13 cases that is known as chapter 7 reconciliation. This rule requires creditors to receive as much funds in a chapter 13 as they would in a chapter 7.
The amount of non-exempt equity will be used to determine the minimum amount that must be paid in a chapter 13. For example, if the home’s non-exempt equity would be adequate to pay $10,000 in a chapter 7 liquidation, the debtor must also pay back at least $10,000 in a chapter 13 reorganization over five years. This amount is determined by taking the fair market value of the home and subtracting the costs of sale, liens (mortgages), and the Colorado exemption amount (between $75k and $105k). We will also subtract the administrative expenses that would be incurred if the home were liquidated in a chapter 7. This formula significantly reduces the amount a debtor would otherwise have to pay.
In some rare cases, the non-exempt equity is adequate to pay-off all the debts listed in the bankruptcy.
If a creditors fails to file a claim for a debt listed in the bankruptcy, your attorney can reduce the chapter 13 plan payment accordingly. The debt will be discharged without payment because the creditor had an opportunity to file a claim with the court before the deadline but failed to do so. This is not uncommon.
One strategy I often use in cases that require 100% payment is to review the claims filed to see if an objection to the claim can be filed. Sometimes the creditor fails to attach the proper supporting documents to the claim. I suggest you ask your attorney about that.