Valuing Real Property in Bankruptcy

Bankruptcy is a powerful tool to reorganize personal debt, including modifying a home mortgage loan. During a Chapter 13, for instance, the second mortgage lien on an underwater home may be stripped off and discharged if the amount of the first mortgage is more or equal to the value of the home. In other words, the second mortgage loan is not actually secured by the home.

Consequently, debtors and creditors often argue about the value of the debtor’s real property. The parties may compromise or agree on a value, but ordinarily modifying a real estate loan involves a contested hearing before the bankruptcy judge.

While every case is a little different, valuing real estate usually necessitates an expert witness to testify as to the value of the property. A new real estate appraisal and live testimony from a licensed appraiser is the safest form of evidence. Because property values can fluctuate quickly and dramatically, a court will give less credibility to an “older” appraisal. In some cases an appraisal made a mere six months ago may be too old.

A common alternative to a full appraisal is a comparable market analysis. While not as expensive as a full appraisal, it has its drawbacks. The comparable market analysis is an opinion by a licensed realtor who compares your house to other homes that have recently sold in your area. Basically it is a comparison of location, size, style, and condition. This evidence is obviously not as compelling as a full appraisal by a licensed appraiser.

In most jurisdictions the homeowner may also provide evidence as to the value of his property. The homeowner is in a unique position to know about defects that may impact the value of the property. For instance, the roof may leak and the repair estimate is $5,000. In most situations, a bankruptcy court will consider debtor testimony highly biased and consider the evidence as self-serving opinion, although it may be helpful in a close case, especially when two experts disagree.

The value of your property can be very important in your bankruptcy case. It can mean the difference between keeping and losing your home, or stripping away a second mortgage or judgment lien. If the property is not residential property, a loan may be crammed down to value, making the value of the property a highly contested issue. If you have property you want to keep during bankruptcy, speak with your bankruptcy attorney to develop a strategy to properly value your real estate before filing the case.