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How Do Homestead Exemptions in Chapter 7 Bankruptcy Work?

Chapter 7 bankruptcy is advised when debts so overwhelm the individual’s ability to repay that assets have to be liquidated. This means that items of value – car, home, furniture, art, jewelry and sometimes even clothing – will be sold by the trustee in the bankruptcy. The proceeds from the sale of those items are then distributed by the bankruptcy court to creditors according to their claims on your property.

But federal and state bankruptcy laws allow for exemptions. That is, some items — or a portion of the value of those items — remain in the bankruptcy filer’s possession. Among these are the homestead exemptions, where most states allow a portion of a home’s value, up to a set amount, to escape the clutches of the bankruptcy settlement.

Homestead exemptions vary by state, but in some states filers can choose between state and federal exemptions guidelines:

Where state exemptions only apply – Missouri, for example, allows only $15,000 for real property and $5,000 for mobile homes, while Montana allows up to $250,000 in real property and mobile home value. Neither these nor 31 other states offer the federal exemptions.

17 states where you can choose state or federal exemptions – Federal exemptions of $21,625 can be applied to all real property, co-ops, mobile homes and burial plots for filers in 17 states. This is not necessarily better than what some of these states apply to homesteads. For example, New Hampshire ($100,000), Alaska ($72,900), New York ($75,000 to $150,000) and Minnesota ($390,000 for homes, $975,000 agricultural-purpose land) offer much more to homeowners.

To give an example, a filer in Missouri with a home valued at $100,000, a $35,000 mortgage and $15,000 exemption would lose that home because approximately $40,000 in value (after transaction costs) could be distributed to creditors. Before making a decision on filing Chapter 7, consult with a bankruptcy attorney so that you understand all your options.

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