Your Home in Bankruptcy: The Homestead Exemption

When filing for bankruptcy, you can protect some equity in your home using a homestead exemption. Keeping your home depends on whether you meet all requirements in Chapters 7 and 13. In this article, you'll learn:

• how a homestead exemption protects home equity
• what you'll need to do to keep a house in Chapters 7 and 13
• where to find the homestead exemption you can use in bankruptcy, and
• related homestead exemption rules.

Because your home is likely your most valuable asset, you'll want to discuss whether you can keep it with a bankruptcy lawyer before filing your bankruptcy case.

What Is the Homestead Exemption?

A homestead exemption protects the equity in your principal residence from creditors. In most states, the homestead exemption is available in and outside bankruptcy.

If you're unsure whether you have home equity, a simple calculation will help. Start by determining how much your house is worth.

Next, subtract the amount owed to your mortgage lender and any other creditor with a lien on your home. The amount remaining, if anything, is your equity, the amount you'd keep if you sold your home.

How Does The Homestead Exemption Work?

The homestead exemption works like any other property exemption used in bankruptcy. After listing your assets in your bankruptcy schedules, you'll list the exemption law that applies to each item.

Chapter 7 and Chapter 13 filers can exempt the same amount of property. However, what happens to "nonexempt property" in Chapters 7 and 13, or those things an exemption doesn't cover, is very different. You'll find more about the chapter differences below.

Can You Use a Wildcard Exemption With the Homestead Exemption?

If the homestead exemption doesn't cover all your home equity, you might be able to supplement it with a wildcard exemption. Typically, a wildcard exemption lets a filer apply the exemption to any asset the filer would like to keep. However, some states don't extend wildcard protection to real estate, and others don't have a wildcard exemption.

Using a Homestead Exemption in Chapter 7 Bankruptcy

You lose nonexempt property in Chapter 7 bankruptcy. If an exemption doesn't cover an item, the trustee appointed to your case will sell it and distribute the sales proceeds to your creditors.

In Chapter 7, you must be able to protect all your home equity with an exemption. If you can't, the Chapter 7 trustee appointed to oversee your case will likely give you a check for the homestead amount and sell the house.

Other Things You Must Do to Keep a Home in Chapter 7 Bankruptcy

But that's not the only thing you'd have to do to keep a house in Chapter 7. To avoid foreclosure by the lender, you'd need to be current on the mortgage when you file and continue to pay the monthly amount.

Although it's possible to negotiate a past-due mortgage in Chapter 7, it's rare, and the lender isn't obligated to make concessions. So if you want to avoid losing your home, it's best to be current when filing for Chapter 7.

Examples of How Homestead Exemptions Work in Chapter 7 Bankruptcy

Use these examples to help understand when a home might be at risk in Chapter 7 bankruptcy.

Example 1. Marissa's home is worth $400,000, and she owes $350,000, leaving $50,000 in equity. Marissa's $175,000 homestead exemption more than covers her home equity. She can keep the house as long as her mortgage payment is current when she files, and she continues making the payment afterward.

Example 2. Robert's home is worth $400,000, and he owes $350,000, leaving $50,000 in equity. Robert's state homestead exemption is $75,000, so the trustee won't sell the house. However, he'll lose the home to foreclosure because he's behind on his mortgage. The lender can ask the bankruptcy court to lift the stay to pursue foreclosure immediately or wait to foreclose after the case ends.

Example 3. Forrest will lose his home in Chapter 7 bankruptcy because he has $230,000 equity but can protect only $100,000 using his state's homestead exemption. Forrest will receive the $100,000 covered by the homestead exemption, and the remainder will go to creditors and the trustee's fee.

The Homestead Exemption in Chapter 13 Bankruptcy

The Chapter 13 trustee doesn't sell property, so filers can keep a home if they meet Chapter 13 requirements. Specifically, you'll need to:

• protect your equity with a homestead or wildcard exemption
• continue making the monthly payment, and
• catch up on overdue payments through the payment plan.

Your income must also cover your monthly living expenses and more. Learn more about your mortgage in Chapter 13.

Using Chapter 13 When Exemptions Don't Protect Equity Fully

People who can't cover all equity with a homestead exemption can still keep a house. But there's a catch. They must pay an amount equal to the noncovered equity plus other amounts required in a Chapter 13 plan.

You might find your plan payment is relatively high if you have a lot of equity. If you can't afford the monthly amount you won't qualify for Chapter 13.

Examples of How Homestead Exemptions Work in Chapter 13 Bankruptcy

Here's what you can expect in Chapter 13 bankruptcy.

Example 1. The homestead exemption covers all of Tory's home equity, and her mortgage payment is up-to-date. Also, she has enough income to continue making her home loan payment and other amounts required in Chapter 13. Tory will be able to keep her home when filing for Chapter 13.

Example 2. Marcus can protect $200,000 of his $260,000 equity using his state's homestead exemption. He can keep his home in Chapter 13 as long as he can afford the payment. He'll need to pay $1,000 per month for the nonexempt portion through his five-year Chapter 13 plan ($1,000 x 60 months = $60,000) plus the regular mortgage payment, monthly living expenses, and other required amounts.

Learn what happens if the Chapter 13 trustee objects to your plan.

Finding Bankruptcy Homestead Exemptions for Your Home Equity

Most state exemptions and the federal bankruptcy exemption system have a homestead exemption. If you live in a state that allows you to choose between federal and state exemptions, you can take advantage of either system. You'll pick the exemption scheme that works best for you.

The federal homestead exemption amount is $27,900 for cases filed between April 1, 2022, and March 31, 2025. (11 U.S.C. § 522(d)(1).) The amount is adjusted every three years, with the next adjustment occurring on April 1, 2025. A married couple filing a joint bankruptcy can double the federal homestead exemption amount if they both have an interest in the property.

Special Homestead Exemption Issues

You don't want to file for bankruptcy and have an odd issue arise that prevents you from keeping your home. Consider discussing these issues with a bankruptcy lawyer.

Have You Lived in Your Home Long Enough?

You must own your home in the state where you currently live for at least 40 months before filing for bankruptcy. Otherwise, your homestead exemption will be capped at $189,050 (for cases filed between April 1, 2022, and March 31, 2025). (11 U.S.C. sec. 522(q).) You aren't subject to the rule if you bought your home using the proceeds from a home sale in that state.

Do You Need to File a Homestead Declaration?

A few states have an additional requirement of recording a homestead declaration with your county land records office before claiming the homestead exemption in bankruptcy.

Could the Mortgage Lien Be Invalid?

People without a mortgage must protect the entire home's value with exemptions. Here's why this is important.

If your mortgage holder didn't record a valid mortgage lien, your mortgage wouldn't be considered in bankruptcy. You'd need to protect the home's entire value with a homestead or wildcard exemption to keep the Chapter 7 trustee from selling it. Or you'd have to pay its full value—up to your total debt amount—in Chapter 13.

This issue is rare because commercial lenders routinely record liens. It usually surfaces when a friend or family loans money and doesn't draw up the paperwork correctly.

Consult With a Bankruptcy Lawyer

You don't want to lose property in Chapter 7, and preparing a Chapter 13 plan that a bankruptcy judge will "confirm" or approve at the Chapter 13 confirmation hearing isn't easy. If you're considering bankruptcy, it's a good idea to meet with a knowledgeable bankruptcy attorney, and many offer free initial consultations.

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.