Federal Law Can Limit the Amount of Your State-Law Homestead Exemption

 If you bought your home within 3 years and 3 months ago, bankruptcy law creates a maximum amount of homestead that you can exempt.

Protecting your assets is one of the most important goals in bankruptcy. And your home is often your most important asset to protect. In spite of this, the federal cap on your state homestead exemption is not discussed much on bankruptcy attorney websites. That’s because it does not often come into play. But this twist in the law is important to be aware of in case it does apply to you and your home. An increase in that cap just went into effect as of April 1, 2013, giving us a good opportunity to tell you about it here.

Exemption Laws

When you file a bankruptcy case, your assets are protected through a set of legal exemptions: a list of the kinds and amounts of assets that creditors can’t touch. The spirit behind exemptions is to give you a little running room as part of your financial fresh start, allowing you to keep certain kinds and amounts of assets so that you are not starting from absolutely nothing. 

State vs. Federal Exemptions

Each state has adopted a set of exemptions. Federal bankruptcy law also contains its own set of exemptions. When filing bankruptcy in any state you may use the state exemptions, and 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 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 it. They vary widely state to state in what they protect and how much. For example, the Alabama homestead exemption protects only $5,000 in value for a single person, while the Montana exemption protects $250,000 for the single person, and the Texas homestead exemption has not dollar limit at all, restricted only by acreage—up to 10 urban acres or 100 rural acres.

There is also a federal homestead exemption, for states where a person has the option of using the federal exemptions and choses to do so. That federal homestead exemption amount is now $22,975 (for bankruptcy cases filed on April 1, 2013 and after).

A Very Limited Federal Cap on the State Homestead Exemption

Federal bankruptcy law allows the use of state homestead exemptions in the ways just described, but what federal law gives it can also take back or limit, in the form of a cap on the amount of a state exemption. The purpose of this cap was to limit the ability of high-asset debtors to quickly shield from their creditors a very large amount of their money by buying a home in a new state with a very high or unlimited homestead exemption. In truth this cap only applies in highly limited circumstances, when:

1. you bought a residence or homestead (or burial plot!) within 1,215 days (three years plus 120 days) before filing bankruptcy; but

2. you did NOT pay for that property through your interest in a previous principal residence, in that same state, that had been acquired more than 1,215 days before filing.

And most important, since the cap is high compared to most state’s allowed homestead exemptions, it only has a potential effect on cases filed in states with larger exemptions than this cap. The amount of this cap is $155,675, as of April 1, 2013. States with lower homestead exemptions aren’t affected, since the homestead values are in effect “capped” at a lower amount by the state homestead exemption law itself.

Summary

IF in your state the applicable homestead exemption amount is more than $155,675, AND you bought your homestead within 1,215 days before filing bankruptcy, BUT you didn’t buy that homestead with proceeds fro mthe sale of another homestead in the same state, THEN you are limited to a homestead exemption of $155,675 on your present homestead. 

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