Understanding Homestead Exemptions Critical

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Prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, before filing for bankruptcy, many people would move to another state that had a more generous homestead exemption than the one they were living in. The new law has much stricter requirements as to which state’s home exemption you can use. However, if you live in a state that allows the choice of federal exemptions, then you can choose the federal exemptions regardless of how long you were living in the state. With personal bankruptcies still on the rise in 2011and the housing crisis causing thousands of homes to be upside down, understanding homestead exemptions is critical if you plan on filing for bankruptcy any time soon.

This personal bankruptcy story was posted on the internet in February of 2011 as comments in a bankruptcy discussion: “I’m new here so not sure if I’m in the right place but I live in nw Indiana.
We are getting ready to file bk soon. We cannot afford to live in this home any longer. It is mortgaged with no equity and lost 30% of it’s value due to the economy. Our business closed and we tapped all savings and credit cards and have not been able to open a successful business or find gainful employment. We have a previous home that has no mortgage. We used to live there about 4 years ago.
We owe about $15k in property tax there. We plan to move back to our previous home that is being rented now…We’d like to use our previous home for the homestead exemption. Does anyone know how long we have to live there to claim it as our primary residence?”

The debtor in this personal bankruptcy illustration has questions about how long she must live in a residence to claim a homestead exemption. The federal exemption for a homestead is limited to $125,000 if the property was acquired within the previous 1215 day (3.3 years). The cap is not applicable to any interest transferred from a debtor’s previous principal residence. The value of the state homestead exemption is reduced by any addition to the value brought about on account of a disposition of nonexempt property made by the debtor during the 10 years prior to the bankruptcy filing. An absolute $125,000 homestead cap applies if either: the court determines that the debtor has been convicted of a felony demonstrating that the filing of the case was a abuse of the provision of the Bankruptcy Code; or the debtor owes a debt arising from a violation of federal or state securities laws, fiduciary fraud, racketeering, or crimes or intentional torts that caused serious bodily injury or death in the preceding 5 years.

The state you use for your exemptions is: the state you lived in for the 730 days (2 years) before filing; or if you did not live in a single state in the previous 2 years you use the state where you lived the majority of the 180 period preceding the 2 year period; or if the preceding renders you ineligible for any exemptions then the debtor is allowed to choose the federal exemptions.

In the case of the debtors in our illustration, they have lived in Indiana for the previous 4 years. That means most likely they cannot go back to their former out of state residence to claim their exemption. Since they currently live in Indiana, a state that does not allow federal homestead exemptions, their homestead exemption is $17,600 of equity (husband and wife may double exemption). The $35,200 is all the husband and wife can protect concerning the two houses. Since they are upside down on their mortgage in Indiana, that house most likely will not be sold. The out of state house most likely will be sold and after the $15,000 back taxes are paid, what is left will be divided up between the homeowner, who gets the first $35,200 (if joint owned), and unsecured creditors, who will get the remainder of the proceeds of the sell. Of course, closing costs, which will include all the costs to sell the home, will be taken out when the house is sold.

Bankruptcy laws can be complicated, and common sense indicates you will probably need a bankruptcy lawyer in order to properly understand how these complex laws may apply in your situation. If you determine you are in need of relief from the stress associated with debt and you live in or around the metropolitan area of Indianapolis, Indiana, contact us today. We will help you find a bankruptcy attorney in your area that will help you with any questions you may have on bankruptcy law.

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