Equity in property is the difference between the fair market value of the property and the amount you owe on any loans or liens associated with the property. Simply put, equity is the profit you would walk away with if you sold your property (car, home, furniture, or the like) and paid off any loans against it.
Equity = (Value of Property) - (Loans & Liens Secured by the Property)
If the resulting number is zero or negative, you don't have any equity in the property. If, however, you get a positive number, that is the amount of equity you have in the property.
When you file for bankruptcy, it's important to understand what equity is, and be able to calculate the equity in your property.
Example: Calculating Equity in Your Home
You purchased a house 10 years ago for $100,000. Today, based on the housing market and comparable sales in your neighborhood, you believe you could sell your house, as is, for $75,000. To arrive at this value, you may have checked comparable sales in your neighborhood, the county auditor’s tax value, or had a broker perform an appraisal.
You owe $55,000 on your first mortgage and $15,000 on a line of equity you took out to fund a roof repair, for a total of $70,000 of debt owed on the home. When you subtract the $70,000 of debt from the $75,000 fair market value, you are left with $5,000 of equity. Depending upon the homestead exemption or wildcard exemptions in your state, you may be able to protect all or part of the equity in your home.
Example: Calculating Equity in Your Car
You own a 2011 Toyota Camry worth $18,000. To determine the value, you checked the Kelley Blue Book and NADA values online and input your car's mileage, features, and condition. You owe the dealer $14,000 on the loan, so you have $4,000 of equity in the vehicle. Depending upon the motor vehicle or wildcard exemptions in your state, you may be able to protect all or part of the equity in your car.
Why Property Equity Is Important in Bankruptcy
When determining whether you can protect your car, home, or other property in a bankruptcy, you must calculate the equity in your property and compare it to the exemptions available to you.
Knowing what property is exempt may help you decide what type of bankruptcy to file (Chapter 7 or Chapter 13). And knowing how much equity you have in certain property can help you plan for, and claim, exemptions so that you can maximize the property you keep, or make sure you keep the property you care about.
To learn more, see Bankruptcy Exemptions.