Site Loader

A common concern many people have when filing bankruptcy is that they will lose their home, but thankfully there is a bankruptcy homestead exemption that may help. This concern mainly applies to a Chapter 7 bankruptcy. In a Chapter 13 bankruptcy, the person can keep their home if they can afford the bankruptcy repayment plan and their regular mortgage payment. However, your home equity can increase the amount of money a debtor must pay in a Chapter 13 bankruptcy. Let’s look more closer at keeping your home in bankruptcy and how a bankruptcy homestead exemption works.

What is a Bankruptcy Homestead Exemption?

A bankruptcy exemption protects a debtor’s equity in certain assets. Your property is protected when the equity amount in a property is less than or equal to the than the bankruptcy exemption. The trustee will not sell your property if this is the case.

The Bankruptcy Code includes federal bankruptcy exemptions. Debtors may claim the federal bankruptcy exemption, including a homestead exemption, in some states. States may opt out of the federal exemptions by enacting state-specific bankruptcy exemptions. States can require debtors that have resided in the state for at least two years to use state bankruptcy exemptions. A few states allow debtors to choose between federal and state exemptions. 

For illustration, we will use the federal bankruptcy exemptions. The federal bankruptcy homestead exemption is currently $25,150 for cases filed on or after April 1, 2019. The government revises these figures every three years to account for inflation.

Do you qualify for a Chapter 7 bankruptcy?

Exemptions are important in a Chapter 7 liquidation bankruptcy. One question is whether you qualify for a Chapter 7 bankruptcy.

You can estimate your qualify using the calculator below. If the result is a “maybe”, this means that you are above the median for your state by below $20,000, so you may want to take our Chapter 7 above-median calculator to estimate whether you’d qualify above the median.

How does the homestead bankruptcy exemption work in a Chapter 7 bankruptcy?

If a Chapter 7 trustee liquidates your home, the trustee must pay you $25,150 for your homestead exemption. Please note a state bankruptcy exemption could be higher. The trustee pays you the exemption after the costs of the sale. The costs of sale include the remaining mortgage amount and any closing costs. 

If the proceeds of sale less your allowed bankruptcy homestead exemption is a negative amount, the Chapter 7 trustee should not liquidate your home. The trustee’s purpose in liquidating your home is to receive funds for the bankruptcy estate. The trustee can then use these funds to pay creditors. Although, if the Chapter 7 trustee does not anticipate receiving any money, then the liquidation will not benefit the creditors. The trustee must first pay to sell your home. Next, the trustee will provide you with the amount equal to your homestead exemption prior to paying any creditors.

However, how much would the Chapter 7 need to receive for the trustee to liquidate your home. That question is a bit more complicated. 

When May a Chapter 7 Trustee Liquidate My Property? 

There is no simple answer to this question. One of the roles of a Chapter 7 trustee is to represent the interests of your unsecured creditors. Unsecured creditors do not hold a lien on collateral, such as a mortgage or title loan. Therefore, they cannot seize your assets until after they pursue a debt collection lawsuit and obtain a personal judgment against you for the debt you owe. Examples of unsecured debts include credit card bills, medical debts, personal loans, and old utility bills.

A Chapter 7 trustee reviews your property to decide whether to liquidate specific items and use those funds to pay your unsecured creditors. If the trustee believes he can receive sufficient funds to distribute to creditors, the trustee may liquidate certain property. 

How does the bankruptcy trustee decide whether to sell a property?

Each Chapter 7 trustee must carefully consider all factors before deciding to sell an asset. Factors may include:

  • The anticipated sales price for the property;
  • The costs of the sale, including a realtor’s commission and closing costs;
  • The Chapter 7 trustee’s commission (graduated percentage based on the amount received by the estate – 25% of the first $5,000, 10% of the next $45,000, and 5% on amounts up to $1,000,000);
  • The sales proceeds must pay for any liens against the property; and,
  • Unsecured creditors do not receive money until the claimed debtors’ bankruptcy exemptions have been paid.

If creditors receive a few pennies on the dollar, the trustee may determine that the property is of “inconsequential value”. In this case, the trustee may decide not to liquidate the property. 

However, you can never assume that a trustee will abandon (not sell) property just because there is a minimal amount of equity in the property. The Chapter 7 trustee has the discretion to decide when to liquidate the property. Chapter 7 bankruptcy attorneys often know the trustees in their jurisdiction. Attorneys are usually aware of how certain trustees handle cases and which trustees may be more willing to liquidate smaller assets.

Calculating How Much Money Unsecured Creditors Might Receive in a Chapter 7 Liquidation

A Chapter 13 bankruptcy trustee considers how much money the bankruptcy estate might receive if a Chapter 7 trustee liquidated the home. The Chapter 13 trustee should consider all of the same factors that a Chapter 7 trustee considers when deciding whether to liquidate a home.

However, you may consider that your home is typically sold for a discounted value in bankruptcy. Purrchasers may not want to wait for the court to approve the sale. They may also fear that the debtor will save the home at the very last moment. Therefore, bankruptcy sales often result in a lower sales price. However, there is no set formula because markets vary significantly by location and by the current economic climate. 

An experienced Chapter 13 bankruptcy attorney generally knows the maximum percentage the Chapter 13 trustees in that jurisdiction allow for calculating the decrease in the home’s value. He/she will often know the difference between a Chapter 7 liquidation home sales to a standard real estate transaction.

How does the homestead bankruptcy exemption work in a Chapter 13 bankruptcy?

Chapter 13 trustees do not liquidate property. Therefore, the Chapter 13 trustee is not going to liquidate your home if your home equity exceeds your bankruptcy exemption, . However, you could be required to pay more money to your unsecured creditors through your Chapter 13 bankruptcy plan.

The key is to determine how much money unsecured creditors would have received in a Chapter 7 case. Your Chapter 13 plan must pay unsecured creditors at least as much as they would have received had you filed under Chapter 7. Therefore, if your unsecured creditors are receiving less through the Chapter 13 plan, the trustee may require you to increase the plan payment until unsecured creditors receive at least as much as they would in a hypothetical Chapter 7 liquidation. 

For example, let’s take the following example of $50,000 is available for unsecured creditors in a hypothetical Chapter 7 liquidation.

  1. That amount would equal a monthly payment toward unsecured debts of $833 over a 60-month Chapter 13 plan. 
  2. If your Chapter 13 payment pays unsecured creditors $1,000 a month based on your disposable income and other factors, that should be sufficient to cover the amount they would have received through a Chapter 7 liquidation.
  3. However, if unsecured creditors are scheduled to receive less than $833 per month through your Chapter 13 plan, you may need to increase your plan payment until the unsecured creditors receive at least $833 per month.

Homestead Exemptions By State in 2020

Now, let’s go through the homestead exemptions state by state, so you can see what the homestead exemptions are for your state.

The Alabama homestead exemption defines as the following, “Ala. Code 6-10-2 – Real property or mobile home to $15,500 after April 1, 2018; property cannot exceed 160 acres (husband & wife may double)”(Source).

Alaska Homestead Exemption

Alaska Stat. § 09.38.010. Principal residence up to $72,900 (joint owners may each claim a portion, but total can’t exceed $72,900)”(Source).

“Ariz. Rev. Stat. § 33-1101A. $150,000 for real property, an apartment, or mobile home you occupy to; sale proceeds exempt 18 months after sale or until new home purchased, whichever occurs first”(Source).

“Ark. Const. art. 4. For married person or head of family: unlimited exemption on real or personal property used as residence to 1/4 acre in city, town, or village, or 80 acres elsewhere; if property is between 1/4�1 acre in city, town, or village, or 80-160 acres elsewhere, additional limit is $2,500; homestead may not exceed 1 acre in city, town, or village, or 160 acres elsewhere (husband & wife may not double)”(Source).

“Cal. Civ. Proc. Code § 704.730. Real or personal property you occupy including mobile home, boat, stock cooperative, community apartment, planned development, or condo to $75,000 if single & not disabled; $100,000 for families if no other member has a homestead (if only one spouse files, may exempt one-half of amount if home held as community property and all of amount if home held as tenants in common); $175,000 if 65 or older, or physically or mentally disabled; $175,000 if 55 or older, single, & gross annual income under $25,000 or married & gross annual income under $35,000 & creditors seek to force the sale of your home; forced sale proceeds received exempt for 6 months after; separated but married debtor may claim homestead in community property still occupied by other spouse.”(Source).

“Colo. Rev. Stat. § 38-41-201. Real property, mobile home, manufactured home, or house trailer you occupy to $75,000; $105,000 if owner, spouse, or dependent is disabled or age 60 or older; sale proceeds exempt 2 years after received”(Source).

“Conn. Gen. Stat. § 52-352b(t). Owner occupied real property, co-op or mobile manufactured home, to $75,000; applies only to claims arising after 1993, but to $125,000 in the case of a money judgment arising out of services provided at a hospital. Husband or wife may double the exemption amount.”(Source).

“10 Del Code Ann. § 4914(c)(1). Equity in real property or equity in a manufactured home that is debtor’s principal residence”(Source).

“Hawaii Rev. Stat. § 651-92(a). $30,000 for head of household or over 65.”(Source).

Post Author: Ben Tejes

Ben Tejes is a co-founder and CEO of Ascend Finance. Before Ascend, Ben held various executive roles at personal finance companies. Ben specializes in Chapter 13 Bankruptcy, Debt Settlement, Chapter 7 Bankruptcy and debt payoff methods. In his free time, Ben enjoys spending time going on adventures with his wife and three young daughters.

Leave a Reply

Your email address will not be published. Required fields are marked *