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What is the Homestead Exemption in Bankruptcy?

7 min read
Philip Ahn, Attorney

by Philip Ahn, Attorney

Most states offer a homestead exemption to help homeowners who are filing bankruptcy to reduce a portion of their property value when determining taxes. In some states, the homestead tax exemption is available to anyone. In others, you must meet specific requirements. 

In Chapter 7 bankruptcy, the homestead exemption protects a specific equity value of the home you live in. The amount of value you can protect is a determining factor in whether you can keep your home in bankruptcy. In Chapter 13, the homestead exemption can help to determine your debt repayment options. 

There is a federal bankruptcy exemption and a state homestead exemption. Depending on the state you live in, you may be able to choose between a federal or state exemption depending on which is more beneficial to you. However, some states don’t allow their residents to choose the federal exemption. 

Learn more about the homestead exemption in bankruptcy below, or connect with a lawyer for a free consultation.

What Does the Homestead Act Protect You From? – How Does it Work? 

If your primary residence has greater value than your mortgage or has liens against it, then your home has equity to protect. Generally, that equity is categorized as an asset in bankruptcy proceedings – which means that a trustee can potentially sell your home and use the equity you’ve accrued to pay off debts in your filing. 

The homestead tax allows those filing bankruptcy to exempt a certain amount of equity and protect it from the trustee. For instance, if your primary residence is worth $300,000 and your mortgage is $275,000, you have $25,000 in equity. 

Since the current federal exemption is $25,150, the government will protect your equity if you’re eligible for the federal exemption. In some states, the exemption level is much higher, and in others, it’s lower. Speak with your bankruptcy lawyer to learn more about how the homestead exemption will affect your bankruptcy case. 

Does the Homestead Exemption Protect You From Creditors?

It’s important to note that the homestead exemption does not protect you from “secured creditors” such as a financial institution that owns the mortgage on your home. However, it does protect you from “unsecured creditors” who will seek to recover the debts you owe by coming after the equity you have in your primary residence. 

Who is Eligible Under the Homestead Act? 

Eligibility for state homestead exemptions depends on your income level, age, or if you are a disabled veteran. Some states restrict homestead exemptions to homes under a certain value. If your state allows you to choose the federal homestead exemption, all applicants who meet the required qualifications are eligible. 

However, the federal government currently caps exemption values at $170,350 if you have not owned your home for at least 40 months in the state where you file. If you’ve committed bankruptcy fraud or other types of crimes, your exemption may be capped. 

Homestead Exemption Laws, Rules, and Requirements Change Often

Federal exemption limits change every three years. Homestead exemption rules and eligibility requirements in states and territories are also subject to frequent changes. Exceptions may exist for those who owe child support, have a criminal record, or owe taxes. It’s advisable to contact a lawyer to learn how current laws affect your case. 

Can I File a Homestead Exemption Online?

Yes, most states allow you to file for a homestead exemption online. Typically, you have three options for homestead exemptions. They include: 

  • E-File online 
  • Completing the application online and then mailing it to the correct agency
  • Visiting a homestead exemption service center online

Usually, you must file your homestead exemption before a certain date to qualify. Check with your state’s website or contact a bankruptcy lawyer to discuss your case. 

What States Offer Property or Homestead Exemptions?

While most states allow homestead exemptions, there are exceptions. States allowing homestead exemptions include: 

AlabamaAlaskaArizona ArkansasCalifornia ColoradoConnecticutDelawareDistrict of ColumbiaFloridaGeorgiaHawaiiIdahoIllinoisIndianaIowaKansasKentuckyLouisianaMaineMarylandMassachusettsMichiganMinnesotaMississippiMissouriMontanaNebraskaNevadaNew HampshireNew MexicoNew YorkNorth CarolinaNorth DakotaOhioOklahomaOregonRhode IslandSouth CarolinaSouth DakotaTennesseeTexasUtahVermontVirginiaWashingtonWest VirginiaWisconsinWyomingAmerican SamoaGuamThe Northern Mariana IslandsPuerto RicoUS Virgin Islands

The U.S. Territories and provinces

The exemption amounts for each state vary significantly. They can be as low as $5,000 up to an unlimited amount. Some states like Pennsylvania and New Jersey don’t offer homestead protection to their citizens. However, those residents are still eligible for the federal exemption if they qualify. 

Can You Homestead in Two Different States? 

Homestead exemption rules differ among states Single people and married couples can only claim one homestead exemption. That’s because the exemption is used exclusively for primary residences. Other types of properties do not qualify and are not afforded the same protections. 

In some cases, married couples in a divorce proceeding may qualify for two homestead exemptions. However, they are usually required to be legally separated, live in separate locations, be financially independent, and each person must own their home (if the divorce isn’t finalized). 

You are also required to be a resident of the state you are “homesteading” in. That’s even true of states like Florida that have the most relaxed homestead exemption rules. 

What Are the Disadvantages of Homestead Exemptions? 

If you are already filing bankruptcy, then there are very few disadvantages to homestead exemptions. They are in place to help homeowners retain their property and protect themselves from creditors. However, there are some notable restrictions and requirements that you should be aware of before filing. They include:

  • Most states don’t allow you to rent your homestead apartment for more than 30 days per year. If you do, it will be considered an investment property and not eligible for a homestead exemption. 
  • Homestead exemptions don’t apply to Medicaid protections. 
  • The bank can still foreclose on your home if you don’t keep up with mortgage payments.
  • Homestead exemptions don’t help consumers avoid probate or estate taxes.
  • An individual, not a business, must own the home. 

Restrictions are not limited to those mentioned above. If you are unsure if homesteading your property is best for you, contact an experienced bankruptcy attorney in your area to discuss your case further. 

Should I Work With a Bankruptcy Lawyer?

Bankruptcy laws and procedures can be complex. That’s especially true if you have many creditors and property. While you are not required to hire a bankruptcy lawyer, it’s typically in your best interest. Mistakes made while filing can lead to dismissed cases or, at the very least, a delay in your procedure. An effective bankruptcy lawyer can:

  • Help eliminate debt via bankruptcy.
  • Provide you with valuable insights about your bankruptcy case.
  • Save you time and money.
  • Complete the paperwork and filing process for you.
  • Leverage their relationships with judges and trustees. 
  • Encourage creditors to stop harassing debt collection calls.
  • Offer certainty and decrease stress.

Individuals who don’t own property, who know the creditors they owe, and who have uncomplicated finances may have an easier route filing Chapter 7 bankruptcy on their own. 

However, recent data suggests that people who hire a bankruptcy lawyer are more likely to have their debts discharged and their bankruptcy approved. If you are unsure if hiring a bankruptcy lawyer is the best route for you, you may benefit from taking advantage of a free consultation. 

It’s important to remember that “mistakes” made in bankruptcy filings can potentially lead to federal criminal bankruptcy fraud charges. Individuals who are not well-versed in bankruptcy law are advised to seek professional help to avoid the pitfalls of DIY bankruptcy filings. 

Contact Us To Learn About Our Affordable and Flexible Bankruptcy Plans

Bankruptcy attorneys are not cheap. They typically require full payment upfront before starting on a case. Their lawyer fees in conjunction with the bankruptcy filing fees can be overwhelming to some. Especially since payment is usually required before filing. 

At Unbundled Legal Help, we understand that everyone can’t afford to pay steep bankruptcy lawyer fees to start the process. That’s why our lawyers offer affordable pay-as-you-go fee structures to fit your budget while your case is in process. 

Additionally, our unbundled bankruptcy lawyers provide virtual consultations so you can begin the process from the comfort and safety of your home. 

If you’re considering bankruptcy but need a lawyer with payment options that fits your budget, contact us today to learn more about our unbundled bankruptcy services.

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