Bankruptcy law sets a maximum dollar amount of protection for your recently-bought home, but this really applies only to certain states.
Our last blog post a couple days ago was about protecting retirement funds in bankruptcy. Today’s is about protecting your home, specifically if you bought your home within the last few years.
Property Exemption Laws
When you file a bankruptcy case, your assets are protected through a set of legal exemptions–a list of categories of assets usually with maximum dollar limits, which you can keep out of the reach of your creditors.
Each state has adopted a set of property exemptions. Federal bankruptcy law also contains its own set of exemptions. When filing bankruptcy in ANY state you may use the state exemptions, plus in some states you also have the option of using the federal set of exemptions instead. This blog post applies only if you are using your state’s exemptions, and in particular applies to your state’s homestead exemption.
The Homestead Exemption
Almost every state has a homestead exemption, protecting their residents’ homes and/or home equity. The homestead exemptions vary widely state to state in how much home value or equity they protect.
At the low end, the Kentucky and Tennessee homestead exemptions protect only $5,000 in value or equity for an individual homeowner.
At the opposite end, the Montana exemption is $250,000, Minnesota’s is $390,000, Rhode Island’s and Massachusetts’s are $500,000, and Nevada’s is $550,000.
Also, the following states have homestead exemptions with no dollar limit (although some have acreage or other limitations): Texas, Oklahoma, Arkansas (if married or head of household), Kansas, Iowa, South Dakota, and Florida.
The Federal Cap on the State Homestead Exemption
As we said at the beginning, under certain circumstances federal bankruptcy law caps the dollar amount of state homestead exemption if you bought the home recently.
The purpose of this cap is to prevent people from moving from a small homestead exemption state and buying a home in a state with a very large or unlimited state homestead exemption in order to shield their assets from their creditors. It also may prevent some long-time residents of these same large exemption states from converting other assets into expensive homes, again shielding those assets from their creditors leading up to filing bankruptcy.
This federal cap on homestead exemptions is $155,675 (increasing to $160,375 on April 1, 2016).
Applicable to High and Unlimited Homestead Exemption States
The relatively large dollar amount of this cap makes it irrelevant to the residents of many states.
This cap will only affect you if your state’s homestead exemption is larger than this cap. That’s true only for the 12 states mentioned above which have either large homestead exemptions (Montana, Minnesota, Rhode Island, Massachusetts and Nevada) or unlimited homestead exemptions (Texas, Oklahoma, Arkansas, Kansas, Iowa, South Dakota, and Florida).
Only Applicable to Relatively Recent Home Purchases
This homestead exemption cap doesn’t kick in unless you bought the home at issue within the 3-years-and-4-months period before filing bankruptcy (within 1,215 days before, to be precise).
And even if you did, the cap doesn’t apply if the equity in the home you bought came from the sale proceeds of another “principal residence” within the same state, which had been purchased before that 3-years-and-4-month period.
The point of these conditions is to cap the large homestead exemptions only for relatively short term residents, or those sinking other money into expensive homes. It’s not designed to prevent those who bought their home more than 1,215 days earlier from using the full state homestead exemption. And it’s not designed for those who bought within that time period but did so by using equity from a prior home bought in that same state before that time period.