A homestead exemption is an important strategy for any one who owns their home, especially if you have equity, meaning it is worth more than is currently owed on the mortgage. It is a form of asset protection that, while not directly related to bankruptcy, can prevent a creditor from coming after the home in a law suit. In essence, it’s a governmental provision intended to prevent people from being thrown on the street.
During either a chapter 7 or chapter 13 bankruptcy, the homestead exemption can be used to determine how much money can be paid towards any unsecured debts. In it’s most basic form, a certain amount of the home’s value is set aside by the state, which then protects that portion of the homes equity.
In the case of a chapter 7 bankruptcy, which is mediated by a trustee, your house can be sold in order to pay off debts. In order to prevent that, an exemption needs to be made on the house’s equity. For chapter 13 bankruptcies, non-exempt home equity may result in very large payments towards unsecured debt. Having a homestead exemption in place can stop that from happening.
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In the state of California, the amount of the exemption is dependent on the residents of the home. For a single individual, the limit is $75,000. For a family of two or more, that limit is $100,000, and for anyone that is disable or over the age of 65, the limit is $175,000.
To put all of this into a real world example, assume that you own a home that’s worth $300,000, but you still owe $200,000 on the mortgage. This means that you have $100,000 of equity in the home, which is the amount that you have paid off so far. During the bankruptcy process, when the homestead exemption comes into play, these numbers will be very important.
For families and disabled people, who have protection equal to $100,000 or more, the creditor will not be able to come after the house. If they did try to sell it, $200,000 would go to the mortgage company, and $100,000 would go to the homeowner, as dictated by the homestead exemption. This leaves the creditor with nothing left for themselves, meaning the sale of the home was a waste of time. However, for the single resident, the protection is only $75,000. That same scenario would leave $25,000 left for the creditor, and it’s likely that they would take the home in order to satisfy the debt.
It’s important to know that a homestead exemption does not protect a homeowner against a foreclosure, and that in the event of missed mortgage payments, the lender can still take the house.
If you would like more information regarding homestead exemptions and how they pertain to bankruptcies in California, please reach out to local CA bankruptcy lawyer. If you’re thinking about filing for bankruptcy, or if you have any questions about your situation, and how we can help you, please contact us today. Our experienced legal professionals understand that no two bankruptcies are the same, and the details of your case matter. Together we can help you protect your assets and navigate the complicated California bankruptcy process.
Elena Steers is a highly experienced bankruptcy attorney, the founder of Law Offices of Steers & Associates, and previously worked as a Bankruptcy Trustee Assistant at the Office of the Chapter 13 Trustee in Los Angeles. Her current affiliations include the State Bar of California, National Association of Consumer Bankruptcy Attorneys, and Central District Consumer Bankruptcy Attorneys Association.