Creative Uses of the Homestead Exemption

If you file a bankruptcy as an Oregon resident, the homestead exemption protects the first $40,000 of equity in your home, $50,000 if you’re married and both of you are on the deed to the property. With the slide in home values of the last several years, most people thinking about bankruptcy don’t have more equity than these amounts. Many have no equity at all, and so they may think they are not helped by the homestead exemption at all. But this exemption is more flexible and powerful than you might think, as the following examples show.

1. Broad Definition of “Homestead” Creates Opportunities:

The homestead exemption covers a lot more than equity in the conventional stand-alone house. If you have an ownership interest in and are living in a manufactured home, whether or not you own the land it sits on, and whether or not it is permanently attached to the land, any equity you have in that home (up to the same $40,000/$50,000 limits) is exempt. That also applies to a floating home or houseboat, as well as a mobile home, again as long as actually living in it when your bankruptcy case is filed. In fact you don’t even need to be living there as long as it’s the home of your spouse, or “dependent child” or “dependent parent.”

This exemption may apply even after you’ve sold your homestead: the proceeds of that sale are protected by the homestead exemption as long as your intent is to use those proceeds to acquire another homestead, and in fact you do so within one year.

Even if you own NO real estate at all, but have paid in advance on a residential lease, your “leasehold interest” is also protected. So is any money you’ve paid in advance on a month-to-month rental—first and last month’s rent and any refundable deposits.

2. Judgment Lien Avoidance:

If there’s a judgment against you, that judgment very likely creates a lien against your real estate. Liens usually have to be paid eventually, and may give the holder of the lien the power to foreclose on your real estate in order to force you to pay. If that real estate is your home, AND if the amount of equity in that real estate (before accounting for the judgment lien) is no more than the applicable $40,000/$50,000 limit, then either a Chapter 7 or Chapter 13 bankruptcy will likely enable you to “void” that judgment lien—take it permanently off the home’s title.

Overall, what’s important is that with the continued slide in market values in most neighborhoods of Portland and the surrounding areas, the protection provided by the homestead exemption has effectively expanded. Homes that may not have been fully covered by the exemption may well now be covered, and judgment liens that could not have been fully avoided may now be avoidable.