Applying The Homestead Exemption to Chapter 7 and Chapter 13 Bankruptcies
In bankruptcy cases, there are distinct strategies that should be put into place when approaching the Homestead Exemption. Our West Palm Beach bankruptcy attorneys are here to explain the differences in exemption requirements when filing for Chapter 13 and Chapter 7.
Equity is established on a personal residence when the value of the property is greater than what is owed to the mortgage lender. Therefore, those who qualify by these standards are able to protect their home under the homestead exemption.
The amount of money covered by the Homestead Exemption depends on the state in which debtors live as well as how long they have been legal residents. For example, Florida has one of the most liberal homestead exemptions for those who have lived in the state for 40 months or more. It can cover the entire value of a home, providing that the land doesn’t exceed half an acre and also that the property was bought at least 1,215 days prior to filing for bankruptcy. (https://www.legalconsumer.com/bankruptcy/bankruptcy-law.php?ST=FL#homestead)
Depending on what bankruptcy chapter is filed, there are different outcomes that can result from the exemption clause. In Chapter 7, if a house is deemed exempt, the trustee will pay back creditors by selling nonexempt assets—such as secondary homes, valuable artwork, or expensive jewelry. If a house is not exempt under Chapter 7 bankruptcy because the residence’s equity does not cover the amount of debt, the trustee will sell the home, pay off the mortgage, reimburse the amount of the exemption, and use the remaining funds to pay back unsecured debt.
In Chapter 13, debtors are able to keep their primary residence. However, they are required to pay back the amount equal to the uncovered portion by the exemption throughout the course of their agreed upon repayment plan.
Here are a couple of situations that exemplify the main differences between the homestead exemption under Chapter 7 and Chapter 13.
1. If someone’s home is valued at $300,000 and their mortgage debt is $200,000, the equity for the home is $100,000. If their state’s home exemption amount includes $100,000 or higher, then under Chapter 7 the debtor would be permitted to keep their home. The home’s equity would not need to be paid in the repayment plan under Chapter 13 homestead.
2. If a state’s home exemption amount does not cover anything greater than $35,000, but a home’s equity is found to be $30,000, the Chapter 7 bankruptcy trustee would sell the house. On the other hand, under the Chapter 13 bankruptcy mandates, the home would be kept; yet, the debtor would be required to pay $30,000 to unsecured creditors throughout the repayment plan.
For states that have an unlimited homestead exemption, such as Florida, there are laws that prevent fraudulent claims. For example, Florida residences are required to have purchased their home 40 months before filing for bankruptcy in order to receive protection greater than $160,375. Additionally, the property must be owned by a person, not a business or corporation.
If you are interested in learning more about the Homestead Exemption when filing for bankruptcy, schedule a consultation with our West Palm Beach bankruptcy attorneys. Contact the legal team at Kelley, Fulton & Kaplan today.