When filing for bankruptcy, if you have equity in your residential home, the homestead exemption can help you protect some or all of your nest egg. In this article, you'll learn:
Read on for details about one of the most popular bankruptcy exemptions, the homestead exemption.
The homestead exemption protects or "exempts" equity in the home in which you reside. Almost every state has a homestead exemption law you can use to protect your home's equity from creditors.
Most states allow you to use the homestead exemption both in and outside bankruptcy. Learn about alternatives to bankruptcy.
Bankruptcy exemptions protect some of your property from creditors. If an exemption covers an asset's equity, you can keep it after filing for bankruptcy.
Bankruptcy exemption amounts vary by state, so the amount you'll be able to protect will depend on where you live (more below). Also, the bankruptcy chapter you file will determine what will happen to your home if you can't protect all of the equity.
Learn about the other requirements you'll need to meet if you want to keep your house in bankruptcy.
In Chapter 7 bankruptcy, the Chapter 7 trustee responsible for your case won't sell your home if the homestead exemption covers all equity. In Chapter 13 bankruptcy, you can keep your residence, but the benefit can come at a hefty price.
Here's more about what to expect in each chapter.
If your house has nonexempt equity in Chapter 7, the bankruptcy trustee will do the following:
Examples of unsecured debts include credit card balances, utility and medical bills, and personal loans. Learn about debts discharged in bankruptcy.
By contrast, a Chapter 13 bankruptcy trustee won't sell your property. Instead, you can keep nonexempt property if you can pay an amount equal to the nonexempt portion through your Chapter 13 repayment plan.
Making the required payment can be problematic if you have lots of nonexempt equity in your home. If you don't have enough income, it's unlikely that the court would approve or "confirm" your three- to five-year repayment plan.
Example 1. Suppose your house is worth $500,000, but you still have a mortgage balance of $400,000. This means that your equity (the amount the trustee would net after a sale) in your home is $100,000. If your state has a homestead exemption greater than $100,000, you'd have nothing to worry about in bankruptcy. In a Chapter 7 case, you could use that exemption to keep the bankruptcy trustee from being able to sell your house to pay your creditors. In a Chapter 13 case, you wouldn't have to pay for any equity in your repayment plan.
Example 2. Assume the same facts except that your state's homestead exemption is only $50,000. In a Chapter 7 bankruptcy, the trustee would sell the house, distribute the money in the manner outlined above, and use the balance to pay unsecured creditors. In a Chapter 13 bankruptcy, you could keep the house, but your unsecured creditors would need to receive at least $50,000 in your three- to five-year repayment plan.
Learn about the differences between filing for bankruptcy and doing nothing.
When you file a bankruptcy case, the court appoints an official called a "bankruptcy trustee" to administer it. The trustee reviews the paperwork filed with the court, as well as additional documents—called 521 documents—sent to the trustee shortly after that.
The 521 documents include paycheck stubs, bank statements, income tax returns, and any other items specially required by the trustee assigned to your matter. For instance, it's not uncommon to provide your most recent car loan or mortgage statement, or the marital settlement agreement from your divorce.
Also, all bankruptcy filers must attend at least one court appearance called a 341 meeting of creditors. During the session, you can expect the trustee to do the following:
A Chapter 7 trustee will sell all nonexempt property and distribute the proceeds to your creditors. A Chapter 13 trustee won't sell your property. Instead, the trustee will evaluate the appropriateness of your three- to five-year repayment plan—including whether you're paying for nonexempt property. If it fails to meet requirements, the trustee will file an objection asking the court to reject it and argue the same at the confirmation hearing. If the plan meets required standards, the trustee will support the plan's confirmation. Further, the trustee will distribute the monthly plan payments to creditors.
The homestead exemption amount is different in each state. A federal exemption system exists under federal law, as well. Your state decides whether you can choose between the state and federal system. If you can choose between the two, you must pick one or the other.
Some states allow you an unlimited or very high homestead exemption amount. Still, most states protect only a modest amount of equity, and a few don't have a homestead exemption.
To find the homestead exemption amount and other exemptions in your state and determine whether you can use the federal bankruptcy exemptions, go to Bankruptcy Exemptions by State.
All exemptions have exclusions or "fine print" that restrict use. We explain some of the rules you should be aware of below. Your local bankruptcy lawyer can explain how they might apply in your case.
Although possible to strike up an agreement with your mortgage lender to bring your overdue mortgage current in Chapter 7, the lender doesn't have to work with you, and many won't. To ensure you don't lose your house in Chapter 7, you'll want to be current on your mortgage, be able to protect all equity with a homestead exemption, and continue making your payment after bankruptcy.
Homestead exemptions aren't always sufficient to protect all of a homeowner's equity. Check whether your state offers a "wildcard exemption" that will allow you to exempt any property of your choosing. The federal exemptions offer a wildcard exemption.
In many instances, you can stack the wildcard exemption on top of your homestead exemption, increasing the total protectable amount. However, some states limit a wildcard's use by precluding real estate or cash.
Federal law restricts homestead exemptions to prevent people from shielding their assets by moving to states with unlimited homestead exemptions shortly before filing for bankruptcy. You must have purchased your home at least 40 months before bankruptcy before you'll qualify for the state's homestead exemption.
However, an exception exists. If you sold your home and bought a new one with the sale proceeds in the new state, the time you owned your first home will count toward the 40-month requirement.
Suppose you can't satisfy the homestead domicile requirement. In that case, federal law caps your homestead exemption at $189,050 regardless of your state exemption amount (for cases filed between April 1, 2022, and March 31, 2025). (28 U.S.C. 522(p),(q).)
Your homestead exemption is also capped at $189,050 if you have committed bankruptcy fraud or other crimes (for cases filed between April 1, 2022, and March 31, 2025). (28 U.S.C. 522(p),(q).) Learn more about bankruptcy fraud and the consequences of bankruptcy fraud.
Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
Updated: November 9, 2022
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