Bankruptcy and the Homestead Exemption

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Written by the Upsolve Team.  Reviewed by Andrea Wimmer, Esq.
Updated May 12, 2020

Summary

Bankruptcy exemptions play an important role in Chapter 7 cases, and the homestead exemption may be the most important of all. It’s the homestead exemption that makes it possible for many people to wipe out unsecured debt in Chapter 7 bankruptcy without losing their homes. In this article, you’ll learn how the homestead exemption may protect your house in bankruptcy. We’ll also touch on some of the limitations of the homestead exemption. And, we’ll discuss alternatives for people who aren’t fully protected by their state’s exemptions.

Bankruptcy exemptions play an important role in Chapter 7 cases, and the homestead exemption may be the most important of all. It’s the homestead exemption that makes it possible for many people to wipe out unsecured debt in Chapter 7 bankruptcy without losing their homes. In this article, you’ll learn how the homestead exemption may protect your house in bankruptcy. We’ll also touch on some of the limitations of the homestead exemption. And, we’ll discuss alternatives for people who aren’t fully protected by their state’s exemptions.

What are Bankruptcy Exemptions? 

Bankruptcy exemptions are special legal protections for certain types of property. State and federal laws create exemptions that shelter certain property from creditors. Exemptions protect that property even in a Chapter 7 bankruptcy case. These exemptions are critical in Chapter 7, because in a Chapter 7 case the bankruptcy trustee can sell nonexempt assets to pay creditors. 

Each state has its own set of exemptions. In some states, the bankruptcy filer has a choice between state and federal bankruptcy exemptions. In others, only state exemptions are available. Some of the most common types of property protected by exemptions include vehicles, work tools, clothing and household goods, and the home you live in. Many states also offer a wildcard exemption. The wildcard exemption is a dollar amount that can be applied to protect any type of property. 

Bankruptcy exemptions don’t affect the rights of secured creditors. In other words, the homestead exemption won’t protect you from foreclosure if you’re in default on your mortgage loan. 

The Homestead Exemption

The homestead exemption doesn’t cover any real estate you might own. It typically applies only to your primary residence. Beyond that, the exemption system is inconsistent. Some states put a limit on the acreage that is eligible for a homestead exemption. Some extend it to trailer homes rather than just fixed structures. Some require a homestead declaration be filed before you can claim the exemption. 

Some states double the homestead exemption for married couples. Others increase the exemption for married couples, but to something less than double the exemption allowed to a single person. Still others apply a fixed exemption regardless of whether the bankruptcy filer is a single person or a married couple. A few states offer no homestead exemption at all. In some states with no homestead exemption, bankruptcy filers can claim the federal homestead exemption. 

Until April 1, 2022, the federal homestead exemption is $25,150. The amount of the state homestead exemption varies dramatically from state to state. While that might seem to make sense at first glance, the amount of the homestead exemption doesn’t necessarily relate to property values in a state. Some Northeastern states with relatively high home values, such as New Jersey, have no homestead exemption at all (though as of the writing of this article, proposed legislation to create a homestead exemption is pending in the state legislature). South Dakota, in the bottom half of the country for median home values, has an unlimited homestead exemption. And Ohio, with median home values in the bottom 20% of the U.S. has a $145,425 homestead exemption. In other words, the homestead exemption provides a lot more protection in some states than it does in others. If you own a home and are considering bankruptcy, it is important to understand how the homestead exemption works. You should also find out the amount of your state’s homestead exemption before making any decisions.

Calculating the Value of an Asset

The homestead exemption, like other bankruptcy exemptions, only has to cover your equity in the property. If your home is worth $150,000, but you owe $130,000 on your mortgage, you have just $20,000 in equity in your home. Although the home itself is worth much more, for purposes of this analysis, the value of your asset is the amount of equity you hold. So, even if you live in an area with high home values and a relatively low homestead exemption, you may be protected if you don’t have a lot of equity in your house. 

Who Can Claim the Homestead Exemption? 

Lawmakers don’t want people relocating to take advantage of more favorable bankruptcy exemptions. That’s while federal law imposes a domicile requirement on the application of state exemptions. 

Moving across the country might sound like an extreme measure few would undertake. But, imagine that you live in New Jersey and own a $400,000 home with no mortgage. You fall on hard times and end up deep in debt. You may qualify for Chapter 7 bankruptcy, but in New Jersey you can only apply the small federal homestead exemption. You stand to lose your home and nearly $375,000 in equity to creditors if you file Chapter 7 in New Jersey. 

In Florida, on the other hand, the homestead exemption is unlimited. If your $400,000 house was located in Florida and you otherwise qualified, you could file Chapter 7, wipe out your unsecured debt, and keep your house. With that much on the line, it’s no surprise that some people think it’s worthwhile to sell the New Jersey house, buy a new home in Florida, and proceed from there. 

To make sure that doesn’t happen, the U.S. Bankruptcy Code requires that a Chapter 7 filer have lived in a state for 730 days before using that state’s bankruptcy exemptions. 

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Options for Homeowners with High Equity

Home equity that exceeds the homestead exemption amount in your state can be an obstacle to filing Chapter 7 bankruptcy. In a Chapter 7 bankruptcy case, any nonexempt property can be liquidated. That means the bankruptcy trustee can sell the nonexempt property and use the money to make partial payment to creditors. 

Most people who file for Chapter 7 bankruptcy don’t lose any property. But, that’s partly because people considering bankruptcy do their research or talk to a bankruptcy lawyer first. Most decide not to file if it will put important property at risk. Of course, a Chapter 7 filer could choose to surrender the property to wipe the slate clean. But, most don’t want to give up the family home. 

In that situation, many people opt for Chapter 13 bankruptcy. Chapter 13 doesn’t wipe out unsecured debt quickly like Chapter 7 bankruptcy. Instead, a Chapter 13 case is built around a three to five year repayment plan. The benefit is that debtors in Chapter 13 keep all of their property. At the same time, Chapter 13 takes the pressure off by spreading out past due payments over time and stopping collection action on balances included in the bankruptcy plan. 

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Upsolve Helps People Find the Right Debt Relief Option

Upsolve is a nonprofit organization that helps people file Chapter 7 bankruptcy on their own. If you qualify, you can use our free web app to prepare your Chapter 7 bankruptcy forms. But, we know that there’s no one-size-fits-all solution for people in financial distress. That’s why we’ve made a wide range of other resources available. On our website, you’ll find information about other debt relief options. These include credit counseling and debt management plans, debt consolidation loans, debt settlement, Chapter 13 bankruptcy and more. 

We also know that not everyone wants to file on their own, and that some Chapter 7 cases are more complicated than others. Want to learn more about Chapter 7 bankruptcy but don’t want to file on your own? Unsure whether Chapter 7 or Chapter 13 would be a better fit for you? We can help you connect with a local bankruptcy attorney to learn more.

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About the authors

The Upsolve Team
Upsolve is lucky to have an incredible team of contributing writers all over the country to help us keep our content up to date, informative, and helpful for everyone who visits upsolve.org!

Andrea Wimmer, Esq.

Andrea practiced exclusively as debtors’ counsel in consumer chapter 7 and 13 cases for more than 10 years before joining Upsolve, first as a contributing writer and editor and ultimately joining the team full time in August 2019. While in private practice, Andrea handled all ban... read more

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