What is a Homestead Exemption in Bankruptcy?

A homestead exemption in bankruptcy is a legal regime to protect the equity value of a an owner’s home from property taxes, creditors and problems that come about with the death of a homeowner spouse. While there are many similarities between homestead exemption statutes, they vary by state, federal and territorial laws and jurisdictions.

What is a homestead?

In the United States, the term homestead often harkens back to the the Homestead Act of 1862, which opened up millions of acres of land to any adult (including women and immigrants who had applied for citizenship) who had not taken up arms against the U.S. government. They could acquire ownership of these government and public domain lands by building a home, making improvements and farming on their land for a minimum of five years.

When used in homestead exemption, the term homestead means a person’s primary residence.

Homestead exemption refers to a legal program in the United States that was designed to protect the value of a residence from expenses and/or forced sale arising from the death of a spouse.

What do homestead exemption laws do for homeowners?

Even though homestead exemption laws vary by state and other jurisdictions, typically, they cover four areas of protection for homeowners that include:

  • – Providing shelter to the surviving spouse of a deceased homeowner
  • – Providing an exemption from property taxes on a home
  • – Preventing the forced sale of a home to meet the demands of creditors. Mortgages, mechanics liens, or sales to pay property taxes, are typical exceptions to this
  • – Allowing a tax-exempt homeowner to vote on property tax increases to homeowners over the threshold, by bond or millage requests

How does the homestead exemption work?

When a home is worth more than what an owner owes on the mortgage and any other liens on it, it is considered equity. The kind of bankruptcy a person files under will determine whether or not a person is able to keep their home, or how much creditors will get paid through the debtors bankruptcy.

Under a Chapter 7 bankruptcy, the amount of a homeowner’s equity is an asset that may be sold by a Chapter 7 trustee as a way to satisfy the debts of the homeowner’s creditors’. A homestead exemption allows a homeowner to exempt a certain amount of their equity in order to protect that portion in a forced sale of their home by a bankruptcy trustee.

The amount of homestead exemptions varies from state to state but if you have $25,000 in home equity and you live in a state that has a homestead exemption of $50,000, your equity is protected. If you have $75,000 in this same state, only $50,000 of your $75,000 worth of equity is protected. In other words, $25,000 may be taken away from you to pay off your creditors.

If a homeowner has not owned their home in a state for a minimum of 40 months prior to filing bankruptcy, federal law caps the exemption amount at $155,675 even in states that have unlimited exemption amounts.

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