Bankruptcy and Your Home: The Homestead Exemption
Most often associated with Chapter 7 bankruptcy, the most common form of bankruptcy filed in the United States, the federal homestead exemption is part of the federal bankruptcy code that allows for a party filing for bankruptcy to keep all or some of the equity in his or her home.
Generally, when filing Chapter 7, assets that are not exempt are turned over to a trustee and liquidated through a bankruptcy sale, with any funds raised being used to pay off creditors. If the sale does not raise enough money to cover the debt in its entirety, the remaining debt is forgiven.
There are some assets, however, that are protected under Chapter 7 filing, including retirement accounts, tools, or equipment that are essential for your employment, and a limited amount of home equity – the difference between the value of the property and what is still owed – depending on state or federal homestead exemptions.
In most cases, those who file for bankruptcy have little or no equity in their home, so it isn’t often a problem. In some cases, there is too much equity and the home will become part of the liquidation process. In Michigan, if you are making payments on a mortgage, you can choose to keep your home and continue to make payments if you do not have too much home equity when you file for bankruptcy.
Homestead Exemption: A Closer Look
The homestead exemption is different depending on the state in which you live, and depending on which is more favorable, you can choose either the state or federal exemption.
In Michigan, a homeowner and his or her dependents may file a homestead exemption of up to $38,225, a figure that rises up to $57,350 if the homeowner is either disabled or 65 or older. In some states, if spouses are filing jointly, the spouse may also file the same exemption, but that is not true in Michigan. The number is adjusted for inflation every three years by the Michigan Department of Treasury, and will next be adjusted in April of 2020.
In addition to your home or condominium, a homestead exemption also includes motor homes, boats, or other watercraft, so those items must also be taken into consideration when calculating exemptions.
There may be limits on the acreage you are allowed to retain, as well. In Michigan, you are allowed up to 40 rural acres or a single lot in an urban area.
The federal homestead exemption is $23,675, which can be doubled for married couples. That means in some cases, it might be a better option to use federal exemptions when filing Chapter 7. Understand, however, that you cannot pick and choose between state and federal exemptions, and must choose either all the state exceptions or all the federal exemptions when you file.
An attorney can help you determine homestead exemption
If you are a homeowner who is struggling financially and are considering filing Chapter 7 bankruptcy, an experienced attorney will help you determine whether or not you should follow Michigan or federal homestead exemptions. For more information, contact Maxwell Dunn’s team for advice about the best option for you. Contact us today at 248-246-1166.