The Short Answer
The homestead exemption protects the equity in your primary residence when you file bankruptcy. In North Carolina, individuals can protect up to $35,000 in home equity, and married couples with both names on the deed can protect up to $70,000. For most of our clients, this is enough to keep their home fully protected. If your equity exceeds those limits, Chapter 13 may offer additional options worth exploring with a bankruptcy attorney.
One of the first questions we often hear from our clients 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.
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 individual’s 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 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, their property is protected.
Key Takeaways
- North Carolina's homestead exemption protects up to $35,000 in home equity per individual named on the deed, or up to $70,000 for a married couple who both appear on the deed.
- The exemption only applies to your primary residence — renters generally won't use it because they hold no equity in the property.
- Whose name is on your deed matters enormously: a married couple with only one spouse on the deed is limited to $35,000 in protection, not $70,000.
- If you don't need the full $35,000 homestead exemption, up to $5,000 of the unused portion can be redirected as a wildcard exemption to protect other personal property.
- Whether you're current or behind on your mortgage affects the chapter you file — Chapter 7 works well when equity falls within exemption limits, while Chapter 13 can help when equity exceeds them or you need to catch up on missed payments.
- Getting an accurate fair market value and mortgage payoff figure is critical, because an overstated home value can put equity at risk that a correct appraisal would show is fully protected.
Attorney Insight
The mistake I see most often is couples assuming both names are on the deed when only one actually is — and that single oversight cuts their homestead protection in half, from $70,000 down to $35,000. We pull the deed before we do anything else, because finding out after you've filed is too late. I've also had clients come in with a tax-assessed value that's significantly higher than what the home would actually sell for today; filing with that inflated number can make equity look unprotected when a proper fair market valuation would have shown it was fully covered. A few hundred dollars spent on an appraisal has saved more than one client's home.
