What does Equity mean?
Equity in the bankruptcy process relates to the net liquidated value of an asset to the bankruptcy estate. When an asset is sold for its fair market value, after any debt obligations have been removed from the asset by paying the debt owed to creditors for the asset, what is left over is the equity in the asset. The equity belongs to the bankruptcy estate unless all or part of it is exempt from the bankruptcy process. Any equity exempted from the bankruptcy process is owned by the filing debtor.
Many debtors ask if they can keep their home if they file Chapter 7 bankruptcy. The answer to this question depends on whether or not the debtor has equity in their home. The trustee's goal is to repay a debtor's unsecured creditors as much as possible. But if the trustee decides to sell the house they will have to pay the mortgage lien first, before distributing any remaining money to the debtor's unsecured creditors. If the debtor has no equity in their home, however, there will be no money left after the sale and payment of the mortgage to give to the unsecured creditors. In this case, because there is no equity in the home, the trustee can decide not to sell the house and allow the debtor to keep it. The debtor will, however, have to continue to make mortgage payments or the creditor will simply foreclose on the home.