More than 479,000 parties filed Chapter 7 bankruptcy cases last year in the United States. Under Chapter 7 of the U.S. Bankruptcy Code,a bankruptcy trustee may seize and liquidate property and assets to pay creditors prior to a discharge of debts. This could mean that your home, financial accounts, and other property may be in jeopardy in exchange for releasing your debt obligations. While this can make many bankruptcy filers fearful of losing their house, it is important to know that the law also provides important exemptions you can apply to protect qualified property and assets. Perhaps the most crucial exemption for homeowners is the homestead exemption, which protects a certain amount of equity in your home.
Federal law includes a homestead exemption that allows you to keep up to $23,675 of equity in your principal residence. However, the homestead exemption is not that simple, as each state sets its own homestead exemption, as well. Additionally, some states require you to use the state homestead exemption while others allow you to choose whether to apply state or federal exemptions. States that allow you to choose include Alaska, Arkansas, Connecticut, District of Columbia, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin. Importantly, you must select an entire set of either state or federal exemptions, as you cannot mix and match. Finally, if your applicable homestead exemption does not cover all of your equity, you may be able to apply a wildcard exemption to the remainder in order to protect your home from creditors.
While you may assume that states offer relatively similar homestead exemptions, in reality, these laws vary wildly and have differing levels of complexity. For example, consider the following:
- Kentucky = $5,000 of equity exempt
- Tennessee = $5,000 exempt, $7,500 exempt for joint owners, $12,500 exempt for single owners over age 62, $25,000 exempt for married spouses both over age 62, $25,000 exempt for those with a minor dependent
- Massachusetts = $500,000 exempt, $1,000,000 exempt for those who are disabled or over age 62
- Arkansas, Florida, Iowa, Kansas, Oklahoma, South Dakota, & Texas = Unlimited exemption in most circumstances
Under New York law, the state homestead exemption varies depending on the county in which you live. For example, you can exempt $142,350 in the counties of Albany, Columbia, Dutchess, Orange, Ulster, and Saratoga. If you live in the counties of New York, Bronx, Queens, Kings, Nassau, Richmond, Suffolk, Putnam, Westchester, or Rockland, you can exempt $170,825. You can only exempt $84,500 in the remaining counties. However, if spouses file for Chapter 7 together, they can double their homestead exemption. The exemption amounts update and adjust every three years in New York.
While it may seem like an easy choice to apply New York state’s homestead exemption instead of the federal homestead exemption, it is imperative that you have an attorney carefully examine the full set of exemptions available compared to the property and assets you want to protect.
It may seem unequitable that certain bankruptcy petitioners may only protect $5,000 of equity in their homes while others have unlimited homestead exemptions. This is especially unfair since most people do not get an option where to file for bankruptcy. You must file in the judicial district that applies to any of the following in the 180 days before filing:
- Where you principally reside (are “domiciled”)
- Where you keep the majority of your assets
- Where you have a business
For many Chapter 7 filers, they only have one option where they can file their petition and they must use the corresponding homestead exemption.
Federal bankruptcy law also caps state homestead exemptions for homes purchased within three years and four months of a bankruptcy petition filing. The current cap under these circumstances is $160,375. This means that even if your state allows unlimited homestead exemption, you will not be able to use it to protect a recently purchased home. This cap aims to prevent people from moving to a high exemption state right before filing or from converting assets into a large property purchase in an unlimited exemption state to protect them.
Whether you can protect your home with your applicable homestead exemption is an important factor when deciding whether to file under Chapter 7 or Chapter 13. If you cannot protect all of the equity in your home, the bankruptcy trustee can sell your home, pay your mortgage balance, give you the amount of your exemption, and then pay the remaining proceeds to your creditors. On the other hand, if the homestead exemption protects all of your equity, you have nothing to worry about when filing for bankruptcy.
Whether differing state homestead exemptions are equitable or not does not change the fact that you may be limited to a certain amount of equity. It is essential to have skilled legal counsel who can evaluate your big picture scenario to advise you whether you can protect your home. In many cases, a knowledgeable attorney can help you apply exemptions in a manner that protects almost all – or all – of your property and assets. The best way to know how bankruptcy will affect you is to consult with a law firm regarding your specific situation.
09/15/2018 | New York