How Bankruptcy Exemptions Work

Bankruptcy Exemptions: Homestead Exemption

Your home is probably the most important asset you'd like to protect. And it's one creditors would love to get their hands on, as most people have a lot of equity in their home. (Equity = your home's value less the amount remaining on your mortgage. So if your home is worth $250,000 and you still owe $100,000 on it, you have $150,000 of equity.) To protect your home, you'll want to use a state or federal homestead exemption.

Most states have a homestead exemption, but as with the other exemptions, they vary wildly in the dollar amount. In Alabama it's $5,000; in Florida, it's unlimited as long as the property is a half-acre or less if you live in a municipality, or 160 acres in the country. In 2014, the federal government was offering a $22,975 exemption. Before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was enacted, some homeowners tried to protect their homes and other assets by moving to a state with a generous homestead exemption, then buying an expensive home. But this act stipulates that those who bought a home within 1,215 days of filing for bankruptcy are limited to a $155,675 exemption (as of 2014) no matter where they live [source: Bulkat].

It's possible that you have a home but no equity in it, or that the amount your state offers will cover your equity. If so -- good news! -- you can keep your home. But remember you still have to continue to pay the mortgage on it if you don't want your lender to foreclose.

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