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How Much Does the Chapter 13 Homestead Exemption Vary?

The nature of a Chapter 13 bankruptcy is that it does not necessarily require filers to liquidate their assets to pay off debt. Instead, filers need to show the court they will be able to pay off those debts over approximately three to five years. This type of bankruptcy arranges for better terms for repaying debt and is often referred to as reorganization.

However, the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act establishes federal rules on how unsecured debts are paid off to creditors in a Chapter 13 filing. This means that an asset such as a second car, a boat or a high-value home could be sold as part of this reorganization.

For example, if a filer has a $600,000 home in which he or she has $450,000 of equity (i.e., a mortgage balance of only $150,000), and his or her debts amount to $1,000,000, the federal Chapter 13 bankruptcy rules push for the sale of that home such that the approximately $450,000 (minus transaction costs) would be used to satisfy claims by creditors.

However, not all of that approximately $450,000 would be paid out. At a minimum, the federal homestead exemption allows the debtor to keep $21,625 from the sale proceeds (and $43,250 for married couples who are jointly filing for bankruptcy).

Only 17 states allow the federal exemption as an option. The remaining 33 states set their own amounts, which vary widely. In Utah, the exemption is $20,000; in Illinois, it is $15,000; in Montana, $250,000; in North Carolina, $35,000 or $60,000 if the filer is widowed and 65 years of age; and in Louisiana, it is $25,000 with certain limits on acreage. Of note, Louisianans get full exemption on the entire house if catastrophic illness or injury was the cause of the debt. Florida generously allows full protection of the homestead (some restrictions apply). To understand exactly what exemptions apply, consult with a reputable bankruptcy attorney.

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