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What Is the Homestead Exemption?

The family home is often an individual’s or couple’s most valuable and substantial asset.  Families generally invest more money in their homes than in any other asset.  So, it stands to reason that many debtors are concerned about whether filing bankruptcy can lead to losing their home.  However, when filing a Chapter 7 liquidation bankruptcy, certain assets are exempt from liquidation.

While federal laws dictate the bankruptcy process, property is the one aspect of bankruptcy where state laws may apply.  Each state can determine whether the debtor may claim property exemptions based on state laws or federal law.  Some states require debtors to use state exemptions and others allow the debtor to choose either.  For some debtors, federal exemptions are more beneficial.

Title 11 United States Code (USC) § 522 - Exemptions enables debtors to claim homesteads as an exemption in Chapter 7 bankruptcy and to abide by the property laws for exemption in their state, if they wish.  A homestead is the debtor’s primary residence.  Home exemptions refer to the amount of equity in the home, not the home’s market value.

States vary regarding homestead exemptions

All states except Pennsylvania have a homestead exemption.  Some states have an “unlimited” homestead exemption, which means that if the individual meets federal residency requirements (lived in the residence for three years and four months prior to filing bankruptcy) and other requirements, the amount of exempt equity in the home can be “unlimited.”  There could be limits based on acreage, but some states don’t have a value limit.  Under such circumstances, a multi-million dollar home would be an exempt asset.  Five states have unlimited homestead exemptions:

  • Florida
  • Texas
  • Kansas
  • Iowa
  • South Dakota

Chapter 7 also takes into account income.  Debtors must demonstrate that they can’t afford to pay creditors back once they’ve paid their reasonable living expenses.  Whether someone decides to file Chapter 7 or Chapter 13 may largely depend on the amount of equity in their home and the homestead exemption their state allows.  Consult an experienced bankruptcy lawyer about the homestead exemption in your state.

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