What is a Homestead Exemption? Can My Creditors Take My Home?
Last updated on
Bankruptcy Basics Bankruptcy Exemptions Chapter 7 Bankruptcy Consumer Laws by State Questions Real Estate and Mortgage Issues
Posted by: Walter Metzen
Homestead exemption laws prevent the sale of a borrower’s home by creditors in satisfaction of a debt.
In many states, whether your home may be subject to forced sale depends on how much home equity you have.
For example, let’s say Jim owes creditors $200,00 after his business failed.
Jim owes a home worth $500,000, encumbered by a $400,000 mortgage, which means he has $100,000 in equity. In most states, homestead exemption laws protect Jim’s home equity from creditors.
Even though Jim owes a large debt, the equity he has in his primary residence is off limits to creditors.
A Homestead is Your Primary Residence
A homestead is defined as your primary residence; investment property does not fall within the definition.
The purpose of homestead exemptions are rooted in public policy. Homeownership is the cornerstone of the American way of life, so legislatures have made it difficult for creditors to take your home away from you in satisfaction of a debt.
In order for a creditor to force the sale of your primary residence, they must have a judgment against you and your home must have equity.
Just how much equity leaves a home vulnerable is a function of state law. Some states, like Florida, have unlimited homestead exemptions, while some others confer less protection.
See also: Do I Have to Pay the Mortgage in Bankruptcy?
How to Calculate the Homestead Exemption
If the equity in your home is below the amount your state exempts, the bankruptcy trustee, or creditors, will not sell your home.
For another example, if you owe $25,000 to a credit card lender who has sued and obtained a judgment against you, that company cannot force the sale of your home as long as all of your home equity is exempt under your state’s exemption limit.
If you live in state X, whose homestead exemption allows for $50,000 in equity to be protected from creditors and your home is worth $300,000 with a $280,000 mortgage balance, creditors cannot take your home. Your $20,000 of home equity falls below the $50,000 state X allows its residents to protect.
The best state’s for homestead exemptions
Florida is one state that has historically had an unlimited homestead exemption, which never allowed a creditor to take a home in satisfaction of a debt — regardless of the home’s value, though there is acreage limitation and a length of ownership requirement.
Other unlimited homestead exemption states, with small exceptions, include Texas, Iowa, Kansas, South Dakota, and Oklahoma, in addition to the District of Columbia. Some other states have fairly generous homestead exemptions, including Nevada ($550,000 equity), Minnesota ($390,000 to $975,000, if a farm), and Montana ($250,000).
The worst states for homestead exemptions
On the other hand, some states have no homestead exemption, like New Jersey and Pennsylvania, though they exempt some form of tenancies.
See also: What Property Can I Keep in a Bankruptcy?
Equity Above Your State’s Homestead Exemption = Possibility of Sale
If a homestead’s value exceeds the limits imposed by state law, creditors may sell the home but the debtor will be entitled to the amount of their state’s exemption.
Let’s illustrate the point with an example.
If your home in state X has a mortgage balance of $200,000 and is worth $300,000, you have $100,000 of home equity. This number exposes $50,000 of equity as “non-exempt” because state X only allows $50,000 of equity to be protected. In this example, creditors could force the sale of the home to go after the $50,000. However, were the home to be sold, you would be entitled to a check for $50,000 (the amount of state X’s homestead exemption). A creditor sale doesn’t destroy the exemption.
When there is only a small amount of non-exempt equity, it is unlikely that a creditor will go through with listing the property because the costs of putting the home on the market outweigh the proceeds gained from the sale. In these cases, it is often possible to negotiate a cash settlement with the creditor, which avoids the headaches of a sale.
You may also be interested in:
- Is an Adjacent Lot Part of the Homestead for Exemption Purposes?
- What is the Difference Between Surrendering a Home and Foreclosure?
- Are You Judgment Proof?
- How Exemption Laws Work Inside and Outside of Bankruptcy
- Will Bankruptcy Cost You Your House?
Walter Metzen is a Board Certified Specialist in Consumer Bankruptcy with over 28 years of experience. He’s represented more than 20,000 bankruptcy clients in and around Detroit where his firm is located. View his profile here.
It's no comments yet.