What is the Homestead Exemption in Bankruptcy?

Happy Family Giving PiggybacksOne of the first questions we often hear from our client’s is “what will happen to my property in bankruptcy?”  It is often a confusing process and can be difficult to understand, which is why it is important to have a good bankruptcy attorney leading the way.

Most of the time your property is protected in bankruptcy. Federal and state laws allow us to use what are called “exemptions” to help protect certain amounts of a family’s real and personal property.  This may include a home, vehicle, retirement savings, bank accounts, furniture and any other property you may have.  Obviously, one of the most important pieces of property to protect is a family’s home if they want to continue to stay in their residence. So, how is a residential property protected in bankruptcy? By using a tool called the homestead exemption.

The Homestead Exemption:

An individual or family’s home can be protected with what is called the homestead exemption in bankruptcy.  An important thing to keep in mind is “homestead” means your residence at the time of filing bankruptcy and is utilized for those clients who have a residential property.  In other words, if you are renting you will not likely come across the homestead exemption in your bankruptcy because you don’t have any equity in the property since it is only a rental.

North Carolina laws allow us to protect $35,000 in equity per individuals name on the deed. For a married couple that has both of their names on the deed to a residence we can exempt up to $70,000 in equity in their residence. Therefore, you can understand the importance of checking your property to see whose names are on the deed to the property. (Note: In North Carolina most married couples will have both of their names on the deed but may have only one name on the mortgage or deed of trust.)

In determining how to best use the homestead exemption we would first want to find out what the person’s situation is on their home.  Are they current?  Behind?  Are they able to get caught up before filing a bankruptcy?  The answers to all of those questions affect whether the client would be filing a Chapter 7 bankruptcy or Chapter 13 bankruptcy.  We would also look at the amount of equity in their home by finding out what’s owed on any mortgages and the current fair market value of the property.  It’s important to be sure we are reflecting accurate values on both the mortgage amount(s) and the property value.

Generally speaking, the homestead exemption allows most people to be able to keep their home.  In a Chapter 7 bankruptcy, whether a person is filing individually or joint with a spouse, the homestead exemption will likely cover what’s remaining in equity.  If you are concerned your house will exceed the exemption amounts mentioned above, we recommend consulting with an experienced bankruptcy attorney.  Chapter 13 bankruptcy could be an option for someone who exceeds the exemption amounts but you would need to consult with a bankruptcy attorney for more accurate options. The homestead exemption is important in bankruptcy because it allows families to be able to keep their homes.

In some cases we find not all clients need to use the max amount of the homestead exemption.  For example, an individual filing may have $25,000 equity in their home and therefore does not require the full amount.  A maximum of $5,000 of the $35,000 can be used for the “wild card” exemption, which can help protect equity in any type of property at all.

Let’s conclude with a short example of how we would use the homestead exemption of John and Jane Doe’s house on 123 Main St.

Fair Market Value:          $200,000

First Mortgage:                 $100,000

Second Mortgage:             $40,000

Equity:                                  $60,000

We then use $30,000 of John Doe’s homestead exemption and $30,000 of Jane Doe’s homestead to exempt the full $60,000 of equity in their residence. Therefore, there property is protected.

Should I Refinance My House to Pay Off Debt?

Family Sitting in Front of HouseDesperate times require desperate measures or so the saying goes.  If you are struggling to pay your debts, primarily the result of the minimum payments on credit cards, medical bills, personal loans, taxes, student loans, etc., should you consider refinancing your home to pay off the debt?

There are several factors to consider. First, you must determine if you have any equity in your home that would allow you to refinance and take the excess proceeds to pay off your debt.  Unfortunately, with the downturn in the economy fewer and fewer people find they have equity in their home.  However, if you are one of the lucky ones that have equity in the home, you need to decide if consolidating the debts into the mortgage loan is your best option.  Is it always a bad idea to refinance your home to pay off debt, no, but you need to consider the pros and cons before you make the decision.

Pros:

The payment on the debt can be spread over the terms of a mortgage, often 30 years, therefore reducing the payment each month.

The interest rate on the mortgage is usually considerably less than what would be paid on credit cards, so there is an automatic savings.

The interest from the mortgage loan can be deducted on your taxes; interest on credit cards and most other personal debts cannot be deducted.  (Interest on student loans is the exception.  It can be deducted, but the deduction is limited and phased out as income reaches a threshold.)

You will be making one consolidated payment each month so there is a convenience factor.

This all sounds great, so why wouldn’t everyone just refinance their home to pay off their other debt.

Cons:

The monthly payment on the home mortgage is larger after refinancing and can be a stretch for the family budget.

If you are unable to make payments on the mortgage due to illness, loss of job, etc., the mortgage company can foreclose on the home.

Again, refinancing the home is not always a bad idea, but you must realize you have placed your largest asset, your “home”, at risk.