A homestead exemption is a legal device meant to help people going through the bankruptcy process to stay in their homes or be reasonably compensated for the loss of their residence. Homestead exemptions date back to the Civil War era, when solutions were being sought to help rehabilitate debtors and ease their transition back into productive society. These allow a limited amount of equity that a homeowner has to be held separately from the assets being used to pay debtors. The precise amount of the homestead exemption and the way it is administered varies widely from state to state. The concept is present in both Chapter 7 and Chapter 13 bankruptcy. In Chapter 7, it prevents the forced sale of the home, and in Chapter 13, it partially determines the amount to be paid to unsecured creditors.
A homestead exemption can only be claimed by someone who has equity in a home. This means that the value of the home must exceed the amount owed on it. If the equity is less than the exemption, homeowners may be able to stay in their home if they can keep up the mortgage payments. If their house is sold, then the debtor can expect part of the amount of the exemption to be returned to them from the sale.
Take the example of a home worth $300,000 with a mortgage balance of $200,000. That leaves $100,000 worth of equity. Debtors who live in a state with a homestead exemption of $100,000 or more can generally stay in their home as long as they continue to pay the mortgage. If the state's homestead exemption amount is lower than that, then the trustee will be able to sell the house and return the amount of the exemption to the debtor.
Although some places go by the federal standard of $23,675 for a single individual or $47,350 for married couples filing jointly for bankruptcy, many states have their own homestead laws. Thus, the amount can vary greatly from state to state. On one end of the spectrum, Florida's homestead exemption applies to the entire value of the property up to 160 acres if it is not located within a municipality. If that residence is within a municipality, then the Florida exemption only applies to a half acre with all improvements for the value of the exemption. In Missouri, on the other hand, only $15,000 in equity can be exempted.
No matter what state the debtor may reside in, if they did not purchase and move to the house at least 40 months before the filing for bankruptcy, then their exemption will have a federal cap of $160,375. One factor to note is that if the homeowner sold their home and used the proceeds to purchase another home in the same state within the 40 months, the ownership of both homes may be counted toward the domicile requirement.
The federal cap on exemption also applies to anyone who has been convicted of bankruptcy fraud or other similar crimes. Some municipalities may impose other homestead exemption caps, and some states will allow the debtor to choose between the state and federal amounts.
People who are filing for bankruptcy may want to speak with their lawyer to find out the cap on the homestead exemption for their state or whether the federal cap applies instead. An attorney can help a client determine whether it would be more beneficial to keep the home and how to work it into a debt repayment plan.
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