Understanding Homestead Exemption in Bankruptcy

certificate of the first homestead according t...

certificate of the first homestead according to the homestead act. given to Daniel Freeman in Beatrice, Nebraska 1963 (Photo credit: Wikipedia)

Understanding homestead exemption in bankruptcy can often be confusing to most laymen facing bankruptcy for the first time. The use of the term “homestead” has a variety of meanings and can often be confusing all by itself.

Homestead exemptions are covered in both state and federal bankruptcy exemption laws. A homestead is normally defined under bankruptcy law as your primary place of residence. It is the home you own and primarily live in with your family.

A lot of the confusion about homesteading becomes confusing because of old state homestead laws. Some states require you to register or designate your homestead for tax purposes. Other states treat any primary residence you own as your homestead whether you designate the title or not. The definitions and inclusive language describing homesteads also vary from state to state.

Regardless of what your state laws deem as homesteaded property, for federal bankruptcy purposes, a homestead is your primary residence, the place in which you and your family live. Under federal and most all state exemption laws, a homestead can only be one property. Depending on the state exemption laws, a homestead usually includes a certain amount of land and a dwelling structure or structures, or it can be represented by the equity in the homestead as represented by a lump some of money.

The federal exemption for a homestead protects equity in your home up to $21,625 when filing as a single and $43,250 when filing jointly with your spouse. This federal law complicates the issue somewhat because it also allows you to apply as a wild card $10,825 of any unused homestead exemption amount to any other property you own. Although your homestead is primarily one piece of property, the exemption for the homestead can be spread out to be used on other pieces of property not your homestead.

As an example, a filing debtor recently provided this information on a bankruptcy forum website: “Can you use the federal homestead exemption towards a second property? I’m married, so if we double the homestead at $43,250, and the home we live in has equity of $27,871, that would leave $15379. Could we apply the $15379 of homestead exemption we have left over towards the $13,000 equity in a second home?”

Whereas the filing debtor in this illustration can claim the $27,871 for their homestead, they will be allowed under the federal exemption guidelines to use only $10,825 of the unused money for the second property. That means they will have an unprotected equity of $4,554 in the second property. Whether or not that amount is enough to cause a bankruptcy trustee to liquidate the property and give the proceeds to the creditors is left up to the trustee. Most likely in this particular case, the trustee might not liquidate the property because of the closing costs that could be associated with selling the property.

Whether you are talking about state or federal bankruptcy laws, understanding homestead exemption in bankruptcy can be complicated. It is recommended you consult with an experienced bankruptcy attorney about homestead exemption laws in your state before you file for bankruptcy protection.

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