KEEPING YOUR HOUSE IN BANKRUPTCY
- Peter Schneider
- Mar 5
- 2 min read
The homestead exemption is a critical protection mechanism in bankruptcy law, designed to help individuals retain their homes even when they are undergoing financial distress. This exemption places a limit on the value of equity in a debtor's primary residence that is protected from creditors during bankruptcy proceedings. Here's a detailed look at how the homestead exemption works and its implications.
What is the Homestead Exemption?
The homestead exemption is a legal provision that helps shield a certain amount of equity in a debtor's home from being seized by creditors in the event of bankruptcy. Equity is defined as the difference between the market value of the home and the outstanding balance on any mortgages or loans secured by the property.
How Does the Homestead Exemption Work?
When a debtor files for bankruptcy, they must list all their assets, including their home. The homestead exemption allows the debtor to protect a specific portion of their home equity from being used to pay off unsecured debts. The amount of the exemption varies widely across different states, as each state sets its own limits and conditions. In Washington, the amount is tied to the median home value of the county in which the property is located. In King county, that means $862,900.00 of equity in a home is exempted from bankruptcy.
Chapter 7 Bankruptcy
In Chapter 7 bankruptcy, also known as liquidation bankruptcy, the trustee is tasked with selling the debtor's non-exempt assets to repay creditors. If the equity in the debtor's home does not exceed the homestead exemption limit, the debtor can keep their home.
Chapter 13 Bankruptcy
In Chapter 13 bankruptcy, or reorganization bankruptcy, the debtor proposes a repayment plan to pay off their debts over three to five years. The homestead exemption plays a crucial role here, as it can reduce the amount the debtor must repay to unsecured creditors. The debtor can keep their home as long as they stay current on their mortgage payments and adhere to the repayment plan.
Conclusion
The homestead exemption is an essential protection for homeowners facing bankruptcy, offering them the opportunity to retain their primary residence despite financial difficulties. Understanding the specific rules and limits of the homestead exemption in your state, as well as the differences between Chapter 7 and Chapter 13 bankruptcy, can help you make informed decisions and navigate the bankruptcy process more effectively.
The thoughts, opinions and musings of this blog are those of Peter Schneider, a consumer advocate attorney at Northwest Debt Resolution, LLC. They are just that, his thoughts, opinions and musings and should be treated as such. They are not legal advice. Do you have more questions? We would be happy to answer your questions:
Bankruptcy and debt questions:
Peter Schneider
206-800-6000
Robocalls and Telephone Consumer Protection Act questions:
Nathen Barton
206-800-6000
Fair Debt Collection Practices Act (FDCPA) questions:
Peter Schneider
206-800-6000
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