Dear Erika: I Think I Need to File Bankruptcy but I Don't Want to Lose My House.

This is a pretty common question and one that I want to answer using a little math.  Every debtor who files for bankruptcy is allowed to use a certain number of exemptions to safeguard their property.  These exemptions come in two forms, federal or state.  In New Mexico you can use either the federal or state exemptions.  Let's look at both scenarios.

Bob and Sue live in a single family home out on Albuquerque's Westside valued at $225,000.00.  They have a first mortgage of $175,000.00.  The federal exemption for equity in a home is $22,975.00 for an individual and $45,950.00 for a couple.  The NM state exemption is $60,000.00 for an individual and $120,000.00 for a couple.  Because of their loan, equity in their home is $50,000.00.  That equity is protected since it is well within the limits of either the state or federal exemptions.  The trustee has no interest because there is no value outside of the mortgage and the protected equity.  The mortgage lender has no interest because it wants Bob and Sue to continue to pay their mortgage each month (not to mention the Bankruptcy Rules that would block it from taking any action.)

Jane and John live in  a newly-built condo in a new development in Santa Fe.  They paid $500,000.00 for the condo but due to a landfill being developed a mile away, their home value has dropped like a stone and the condo is now worth $375,000.00 Jane and John have a first mortgage of $425,000.00 and a home equity line of credit of $35,000.00.  They owe more on this home than its valued at (-$85,000.00).  We call this negative equity or its sometimes referred to as an upside-down home.  There is no equity to protect.  The trustee doesn't want this house, the lenders don't want this house and, frankly, Jane and John should think long an hard about whether or not they want this house.  It may have started off as their dream home but it's now a money pit.  If they are already contemplating bankruptcy, it is a good time to assess whether they want to surrender the home and start fresh.