If you bought your home within the last 39 months or so, federal law may limit the amount of state-law homestead exemption you can use.
Protecting your assets is one of the most important goals in bankruptcy. And your home is often your most important asset to protect. There’s federal maximum limit on your state homestead exemption in certain circumstances. This limit is relatively high so it does not often come into play. But it’s important if it does apply to you and your home.
When you file a bankruptcy case, your assets are protected through a set of legal exemptions. These are a list of the kinds and amounts of assets that creditors can’t touch. The point of these exemptions is that in order for you to have a sensible financial fresh start, you should be able to keep certain kinds and amounts of assets so that you are not starting from scratch.
State vs. Federal Exemptions
Each state has adopted a set of property exemptions. Federal bankruptcy law also contains its own set of exemptions. See Section 522(d) of the Bankruptcy Code. When filing bankruptcy in any state you may use the state exemptions. In some states you also have the option of using the federal set of exemptions. That’s because bankruptcy law gives each state the right to either require its bankruptcy-filing residents to use only that state’s exemptions, or instead to allow them to use either the federal or state exemptions.
The Homestead Exemption
Virtually every state has a homestead exemption, protecting your home and/or your equity in that home. They vary widely state to state in what they protect and how much. For example, the Alabama homestead exemption protects only $15,000 in value for a single person, while the Montana exemption protects $250,000, and the Texas and Florida homestead exemptions have not dollar limit at all.
There is also a federal homestead exemption. This applies only to states where a person has the option of using the federal exemptions, and chooses to use it. That federal homestead exemption amount is now $23,675 (as of the April 1, 2016 3-year inflation adjustment.)
A Very Limited Federal Limit on the State Homestead Exemption
State homestead exemptions are often much higher than the federal homestead exemption amount just referenced in the above paragraph. But federal bankruptcy law also puts a limit on the amount of a state exemption you can use in certain circumstances.
The purpose of this limit is to stop high-asset debtors from shielding substantial money from their creditors by buying a home in a new state with a high or unlimited homestead exemption. This limit only applies in the following circumstances:
1. if you bought a homestead within 1,215 days (three years plus 120 days) before filing bankruptcy; and
2. you did not pay for that property through your interest in a previous principal residence, in that same state.
The federal homestead exemption limit that applies in these circumstances is relatively high—$160,375 (again, as of April 1, 2016). Since this is larger than many states’ allowed homestead exemptions, it only has a potential effect on cases filed in states with larger exemptions than this amount. Bankruptcies filed in states with lower homestead exemptions aren’t affected by this $160,375 maximum.
If your state homestead exemption is more than $160,375, and you bought your homestead within 1,215 days before filing bankruptcy, and you didn’t buy that homestead with proceeds from the sale of another homestead in the same state, then you are limited to a homestead exemption of $160,375 on your present homestead.