Before declaring bankruptcy, you would want to know if you can retain your valuable property, particularly your home. Individuals who are eligible for the homestead exemption can use it both in and out of bankruptcy to secure some equity in a residential property. However, the process varies based on when you intend to use the exemption. This article describes how a homestead exemption works and how it relates to bankruptcy.
Understanding the Homestead Exemption
A homestead exemption is defined as a legal tool that allows individuals filing for bankruptcy to retain their houses. It can also be used to fairly compensate people who have lost their residential property. Homestead exemption stretches back to the 1860s when remedies were sought to assist debtors in rehabilitating and transitioning back into a sustainable society.
This allows a certain amount of equity owned by a homeowner to be kept separate from assets needed to pay debts. The actual amount of homestead exemption, as well as how it is managed, varies greatly by jurisdiction. The idea can be addressed in both Chapter 13 and Chapter 7 bankruptcy.
Homestead Exemption in Bankruptcy
If your home is covered by the California homestead exemption, a Chapter 7 bankruptcy trustee assigned to your case could not sell the property. On the other hand, you get to keep your home if you file for Chapter 13 bankruptcy. However, this advantage may come at a high cost. Below is a breakdown of what you can expect in each type.
Chapter 7
If you declare Chapter 7 bankruptcy, you could be able to retain your house depending on several factors, such as the state's homestead exemption. You could be able to retain your residence if you meet the following requirements:
- If you qualify for the homestead exemption
- If you are up-to-date with your home loan repayments
You'll probably lose your house if you fail to comply with one or both of these conditions. You can retain property that is considered "exempt" from lenders in bankruptcy under state or federal law. This legal tool helps to safeguard the equity of your primary residence.
In Chapter 7, you are required to hand over any nonexempt assets to the bankruptcy trustee. The trustee liquidates non-exempt properties and distributes the cash to your lenders.
You can retain your residence if your home equity is secured by the applicable homestead exemption and you are up-to-date on your home loan payments. However, the following circumstances in Chapter 7 could result in you losing your property:
- If you possess too much home equity and are unable to secure it through an exemption, the bankruptcy trustee would sell your home
- If you fall behind on your mortgage payments, your creditor will most likely foreclose once you are discharged from bankruptcy. The lender would also file a motion requesting the court to withdraw the automatic stay and enable him or her to continue with the foreclosure
In many cases, declaring Chapter 13 bankruptcy will allow debtors in these situations to retain their houses. Filers can use Chapter 13 repayment schedules to keep up with mortgage payments.
Chapter 13
A Chapter 13 trustee, on the other hand, will not sell your home. Instead, if you're able to settle an amount equivalent to the nonexempt share through a Chapter 13 repayment schedule, you could retain nonexempt properties.
Raising the monthly payment could be difficult if you possess a lot of nonexempt equity in your house. If you do not have the required amount of income, the court is unlikely to "confirm" or approve the 3- to 5- year repayment schedule.
How the Homestead Exemption Works
If the value of your house exceeds the balance of your home loans or other debts, then you're considered to have home equity. Your equity balance counts as an asset in bankruptcy. A Chapter 7 bankruptcy trustee could be allowed to liquidate your home and use the proceeds to repay lenders. The homestead exemption permits you to exempt and safeguard a specific amount of your equity from creditors.
For instance, if you own a $400,000 home and owe $300,000 on it, you have $100,000 in equity. If you reside in a state where the homestead exemption is $150,000, your home equity will be protected. The bankruptcy trustee will also not be able to take your home.
However, if you reside in a jurisdiction with a $20,000 homestead exemption, the trustee will most certainly seize and sell your property. You will receive the exemption sum of $20,000 from the sale proceeds. The remainder would be used to settle your mortgage, the bankruptcy trustee's fees, and your lenders.
Understanding the Roles of a Bankruptcy Trustee
When you declare bankruptcy, the court assigns an official known as a "bankruptcy trustee" to oversee the proceedings. The trustee evaluates the material presented to the bankruptcy court and any further 521 documents that were delivered to the trustee.
This requirement includes bank statements, paycheck stubs, income tax records, and any other information specifically requested by the trustee designated to your case. For example, it's not unusual to provide the terms of your divorce's marriage settlement agreement or your most current mortgage or car loan statement. In addition, all filers would show up in court at least once for a 341 meeting.
During these sessions, the trustee will undertake the following:
- Place you under oath
- Authenticate your identification
- Check the validity of your petition
- Enquire about any unusual information discovered in your bankruptcy documents
- Ask typical questions of everyone present, and allow lenders in attendance to pose questions about the case
All nonexempt assets will be sold by a Chapter 7 bankruptcy trustee, who will then pay your creditors the proceeds. A Chapter 13 bankruptcy trustee on the other hand will not be able to sell your house. Instead, he or she will assess your three to five-year repayment schedule's suitability, taking into account whether you are making payments for non-exempt properties.
If it doesn't meet the conditions, the bankruptcy trustee would raise an objection requesting the courts to disapprove it. They will also justify the same argument during the confirmation hearing. If the schedule meets the required standards, the bankruptcy trustee will approve its confirmation. The trustee would also disburse the monthly payments to the lenders.
What is the Maximum Amount of Equity That can be Exempted?
The answer is dependent on where you live. You can claim a homestead exemption under the United States bankruptcy exemption scheme as well as various state exemption statutes. The U.S homestead exemption limit is 27,900 dollars for claims filed between the 1st of April 2022, and the 31st of March 2025. This is under Title 11 of the United States Code section 522(d)(1).
The sum is revised every three years, and the following revision will take effect on the 1st of April 2025. If both partners have a stake in the property, a married couple seeking joint bankruptcy could double the national homestead exemption sum.
You can benefit from either system if you reside in a jurisdiction that gives you the option to select between state and federal exemptions. You can select the exemption strategy that is most convenient for you.
Nonetheless, you won't be allowed to apply for the U.S. homestead exemption if you reside in a jurisdiction that demands that you utilize state exemptions. The amount of home equity you could safeguard in bankruptcy is determined by the exemptions in the state.
Your Mortgage Should Be Up to date in Chapter 7 Bankruptcy
Even though your equity is safeguarded, keep in mind that you risk losing your house if you fall behind with the mortgage payments as you declare Chapter 7 bankruptcy. This is because Chapter 7 does not eliminate mortgage liens
If you fail to make your payments, the lender may request that the bankruptcy court remove the automatic stay so that they may foreclose. Alternatively, the lender could hold off on foreclosing until after the Chapter 7 bankruptcy comes to an end.
You might be capable of saving your house by declaring Chapter 13 bankruptcy instead since you can settle a mortgage obligation.
Submitting a Homestead Declaration
To qualify for the homestead exemption when declaring bankruptcy, several states demand that you file a homestead declaration through the county office of land records. When declaring bankruptcy, nonetheless, you are not required to claim a California homestead.
Since the homestead exemption during bankruptcy is automatic, you won't have to submit a homestead proclamation to the assessor's office where the property is situated to take advantage of it.
Instead, you'll declare the homestead exemption on Schedule C when filing your bankruptcy application.
Special Concerns Regarding Homestead Exemptions
Your homestead exemption could be limited to $189,050 if have not owned the property for a period of 1,215 days prior to the bankruptcy filing.
Nonetheless, if the trustee can remove any of your house's liens, it could free up sufficient equity to tip the scales, making it reasonable to liquidate your property and split the earnings with your lenders.
Consult your bankruptcy lawyer if you believe some liens against your property may not have been properly recorded.
How to Navigate Your California Bankruptcy Proceedings
Because bankruptcy is fundamentally a qualification procedure, it is a unique area of law. The laws outline how to complete a 50–60 page bankruptcy case and since all statutes are relevant in every scenario, you cannot omit any steps.
Using your bankruptcy documents as an overview might assist you in keeping abreast of your inquiry. This offers bankruptcy forms relating to exemptions as well as other exemption information. It can also help you navigate Chapter 7 and Chapter 13 bankruptcy documents so that you can understand how your matter fits into the overall bankruptcy plan.
You can use our bankruptcy guidelines to collect the information you'll need to finish your appeal.
Domicile Requirement for Homestead Exemption
Federal law limits the homestead exemption to discourage individuals from securing their property by relocating to jurisdictions that offer unrestricted homestead exemptions. To be eligible for the state homestead exemption, your home had to be bought a minimum of 1,215 days before filing for bankruptcy.
There is, however, one exception. The time you spent owning your first house will count toward the 1,215-day minimum if you sold it and used the sale funds to purchase a new home in the new state.
Regardless of your state's exemption amount, the federal government will limit your homestead exemption at $189,050 if you’re not able to meet this homestead domicile criterion (this is for cases submitted between the 1st of April 2022, and the 31st of March, 2025).
In addition, if you've been convicted of bankruptcy fraud or any other felonies, the homestead exemption will be limited to $189,050.
Can I Get a California Homestead Exemption Even Though I'm Not On the Title?
The kinds of ownership rights that qualify for homestead exemptions have been outlined by courts. However, a homestead exemption could be available for certain legal interests. For the majority of property owners, being a lawful owner on the title and residing in the property the moment the judgment applies or the bankruptcy is declared will often be sufficient.
Can I Receive a Homestead Exemption even though I Don't Reside on the Estate?
In some cases, even though the homeowner is not present, they may still be able to file for homestead exemption. According to state law, the following elements should be taken into account by a court when assessing residency for exemption purposes:
- The actual occupancy of the estate
- The purpose for which the estate is occupied
The homestead exemption is available to a debtor who was momentarily away from the residence on the petition's filing date. The best course of action, nevertheless, is to stay in the home until the bankruptcy matter or the court ruling stops a homestead exemption problem from emerging.
Find a Sacramento Bankruptcy Attorney Near Me
People considering bankruptcy should consult with an attorney to determine if the federal or State homestead exemption limitation applies. A lawyer can assist you in deciding if it could be more advantageous to retain your home as well as how to include it in your debt repayment schedule.
The Sacramento Bankruptcy Lawyer will help defend your constitutional rights. Our attorneys have assisted many clients looking for legal assistance in Sacramento, CA. To speak with one of our representatives, call us at 916-800-7690 right away.
