According to the headlines, the real estate market is red hot and some homes are selling in less than 24 hours for more than asking price.

Although we can celebrate the end of the housing bust of 2008, this rapid increase in home values can cause special problems for those folks filing bankruptcy.  Why is this a problem?  Because Nebraska homestead exemption laws protect a maximum of $60,000 of home equity in bankruptcy proceedings.

Most bankruptcy attorneys value real estate at the tax assessment value.  The problem is, many of those values were rolled back after the 2008 housing bust when homeowners complained that they could not sell their homes for anything close to the assessed values established during the housing boom.  But times have changed and assessed values have failed to keep pace with the rising housing market, so valuing real estate at tax assessment values can be dangerous.

Reviewing recent bankruptcy cases filed in Nebraska, I noticed differences in values reported on actual bankruptcy schedules versus the values reported by online services such as Zillow.com or Realtor.com.

Value Reported in Bankruptcy                    Zillow.com Value          Difference

$  88,376                                                               $ 128,339                     $  39,963

$ 254,000                                                              $ 308,711                     $  54,711

$ 30,400                                                                 $ 65,976                      $  35,576

When a bankruptcy attorney undervalues real estate by this much, tragic things can happen.  In Chapter 7 cases the Trustee has the power to seize homes that exceed the $60,000 homestead equity limit.  In Chapter 13 cases the trustee will demand that the monthly payment be increased by hundreds of dollars  to pay creditors the non-exempt equity.

I see a lot of sloppy bankruptcy schedules prepared out there.  When it comes to real estate, that type of laziness can be lethal.

Take for example how one attorney described a debtor’s residence:  “Homestead, 1302 South XX Street, XXXX, NE 681XX, value $130,000, mortgage balance $139,578.”  Does that really say enough?  Do you see a problem here?  Unfortunately, this is how about 90% of the cases are prepared.  (By the way, that home is valued at $165,537 by Zillow.  The bankruptcy schedules were off by $35,537!)

Imagine that you are a Chapter 7 bankruptcy trustee.  Your job is to interview each debtor who files a case.  You are paid $60 to review each case, but you are also paid a commission that starts at 25% for each unprotected asset you discover and liquidate.  Are you satisfied by the above description?  Probably not.  I would want to know a lot more about this property.

• When was the property purchased?
• What was the purchase price?
• How big is the lot?  An acre? A city lot?  10 acres?  Yes, size matters.
• When was the home built?
• What is the tax assessment value?
• Has the mortgage been refinanced recently?  If so, was the home appraised at that time?
• What is the Zillow value?
• Is there any damage to the home?

When a bankruptcy attorney leaves out this information on the bankruptcy schedule, the bankruptcy trustee starts drilling the debtor for answers at the court hearing.  I don’t trust bankruptcy schedules that lack detail, and neither do the Trustees. Cheap bankruptcy attorneys tend to prepare schedules that lack detail.  They tend to lose homes to trustees as well because of their lack of caution and thoroughness.

Great bankruptcy attorneys leave nothing to chance.  They develop systems and standard operating procedures to ensure that cases are prepared correctly, that assets are properly valued and that clients are alerted to possible dangers that may exist.

Be careful in your choice of bankruptcy attorneys.  Keeping your home may just depend on that choice.