When going through Chapter 7 bankruptcy for debt relief, you may be worried the bankruptcy trustee will take everything you own. Chapter 7 bankruptcy can mean you lose a lot of your assets. However, some property is exempt from being sold off. One of the most significant federal bankruptcy exemptions is your home.

With a homestead exemption, people filing for bankruptcy can keep some or all of their home equity. To understand what will happen to your home under federal bankruptcy laws, talk to a bankruptcy lawyer about your options.

What Is the Homestead Exemption?

The federal homestead exemption is a way to help people going through bankruptcy stay in their homes or get reasonable compensation for the loss of their primary residence. Homestead exemptions date back to the Civil War era to find solutions to help rehabilitate debtors and ease their transition back into productive society. These allow a homeowner a limited amount of equity to be held separately from the assets used to pay debtors.

The homestead exemption’s precise amount and how it is administered varies by state law. It applies to both Chapter 7 and Chapter 13 bankruptcy. In Chapter 7, it prevents the forced sale of the home. In Chapter 13, it partially determines the amount to pay to unsecured creditors.

Can I Use the Homestead Exemption in a Bankruptcy Case?

You can only claim a homestead exemption in your bankruptcy filing if you have equity in your home. This means that the value of the home exceeds the amount you owe. If the equity is less than the exemption, you may be able to stay in your home if you can keep up the mortgage payments. If your house is sold, then you can expect part of the amount of the exemption to be returned from the sale.

How Does the Homestead Exemption Work?

Take the example of a home worth $300,000 with a mortgage balance of $200,000. That leaves $100,000 worth of equity. If you live in a state with a homestead exemption of $100,000, you can stay in your home as long as you 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 you.

How Much Value Can I Use in the Homestead Exemption?

As of 2022, the federal homestead exemption is $27,900, or double for married couples in a joint bankruptcy. Some states follow the federal amount, but others have different exemption systems. Other states, like New Jersey and Pennsylvania, have no homestead protections, so you could use the federal homestead exemption if you live in one of these states.

In other states, like New York, the exemption varies by county. In New York exemptions, a home in Kings or Queens County could be exempt for up to $179,950 in 2022, but in Dutchess or Saratoga County, the exemption is $149,975.

Several states, like Florida, have full homestead declaration exemptions up to 160 acres if it is not within a city municipality. If the home is within a municipality, then the Florida exemption only applies to one-half acre with all improvements for the home’s value exemption.

Homestead Exemption Rules and Restrictions

No matter what state you live in, if you did not purchase and move to the house at least 40 months before filing for bankruptcy, your exemption will have a federal cap of $189,050 (in 2022). If you sold your home and used the money to buy another home in the same state within 40 months, the ownership of both homes may be counted toward the domicile requirement.

The federal cap on exemptions also applies to anyone convicted of bankruptcy fraud or other similar crimes. Some municipalities may impose other homestead exemption caps, and some states will allow debtors to choose between the state and federal amounts.

How Can a Lawyer Help Me Keep My Home in Bankruptcy?

Speak with an experienced bankruptcy attorney to find out the homestead exemption laws in your state or whether the federal cap applies instead. A bankruptcy attorney can help you determine whether it would be more beneficial to keep your home and how to work it into a debt repayment plan.