Filing for bankruptcy is traumatic and shameful for many people. However, it doesn’t mean that you lose all your belongings when you file for it. Homestead exemption can help protect your home from going under the hammer, if it has more value than what you owe to the debt lender. If you file for bankruptcy under chapter 7, the bankruptcy trustee won’t sell your home if homestead exemption covers entire equity. In case you file under chapter 13, you get to keep your home but have to pay your creditors, as per your repayment plan, an amount equalling the non-exempt equity (the portion which isn’t covered by exemption)
How Can Homestead Exemption be used for Your Benefit?
Since the equity in your home is an asset (like every property you own), bankruptcy exemptions allow you to protect property which is essential in maintaining family and service. As Per Los Angeles based law firm Recovery Law Group, every state has a different amount for bankruptcy exemption. Thus the actual exemption amount will vary not only on the chapter you file for bankruptcy under, but also the state where you live.
In case you file for bankruptcy under chapter 7, the bankruptcy trustee is allowed to sell any non-exempted property. If however, your house has non-exempt equity, the following options are available to the trustee:
- Sell home,
- Pay off mortgage,
- Reimburse the owner amount equivalent to homestead exemption, and
- Use remaining money to pay fees and unsecured creditors (credit card, medical bills, personal loans etc.)
Contrary to the former case, when bankruptcy is filed under chapter 13, the bankruptcy trustee won’t sell your property but, you will have to pay an amount equal to the non-exempt portion of the property through your repayment plan. In case the non-exempt equity is less, it isn’t an issue. However, if the non-exempt equity in your home is immense and you don’t have an income to support the repayment, the court is highly unlikely to approve your 3-5 year repayment plan.
Role of Bankruptcy Trustee
Bankruptcy trustee is a court appointed official to review the paperwork (both filed in the court and other additional documents known as 521 documents) and administer the entire bankruptcy proceedings. The 521 documents include bank statements, pay check stubs, income tax returns and other documents which may have an effect on bankruptcy proceedings like mortgage statements, car loan or settlement agreement post-divorce. It is mandatory for all bankruptcy filers to attend a minimum of one court appearance known as 341 meeting of creditors, where the trustee can:
- Place you under oath
- Verify your identity and authenticity of your bankruptcy petition
- Enquire about any unusual details found in bankruptcy paperwork
- Ask standard questions
- Allow creditors present to ask questions pertaining to your case
While a chapter 7 trustee will sell all non-exempt property and dispense the proceeds to the creditors, the chapter 13 trustee won’t do so. In the latter case, the trustee evaluates your 3-5 year repayment plan (including whether you are paying for non-exempt property or not). In case, it doesn’t meet the mandatory requirements, the trustee files an objection in the court against it and will argue the same at confirmation hearing. If the plan meets the required criteria, it is approved by the trustee and he/she will distribute monthly payments to creditors.
Homestead Exemption & Domicile Requirement
The homestead exemption varies from state to state. The federal law also provides a federal exemption system, however, many states do not allow the bankruptcy filer a choice between the state and federal schemes. Some states allow very high or unlimited homestead exemption, but a majority of them protect a moderate amount of equity, while some others don’t offer any. It is recommended to find out the homestead exemption amount in your state as well as whether you can opt for federal bankruptcy exemptions or not.
Since many people shield assets by either buying property in states with unlimited homestead exemption or moving them to other states, strict federal laws are in place for homestead exemptions. It is therefore mandatory that your home should have been purchased at least 40 months prior to filing for bankruptcy. In case this condition is not met, the homestead exemption under federal law is capped at $170350 irrespective of the state exemption amount (as of 1st April 2019 and $160375 for cases filed between 1st April 2016 – 31st March 2019). The homestead exemption remains the same ($175350) if you have committed bankruptcy fraud or any other related crime.