Many people worry that if they file for bankruptcy, they will lose everything - their house, their car, anything of value that can be sold to pay their debts. Fortunately, this is not the case. Bankruptcy law provides for various exemptions that allow people to retain property and avoid creditors’ claims. One of the most important of these exemptions is called the “homestead exemption,” which allows people to keep their homes.
For most people, their home is their most valuable asset, and losing it to foreclosure creates tremendous hardship. Not only do you lose whatever value you have paid into it, but your family is displaced and you are left with nowhere to live. In many cases, losing their home leaves people truly destitute.
As a result, the homestead exemption was created to help people protect this asset and use it to build a better life. Subject to certain requirements, claiming your home under the homestead exemption can keep it out of the hands of creditors and keep your family and your future safe.
Bankruptcy cases are subject to federal law, but in the Bankruptcy Code, Congress gave states the option to use the exemptions provided in the bankruptcy code and/or the exemptions provided in state law. States that allow people filing for bankruptcy the ability to use either the exemptions in the Bankruptcy Code or state law are called “opt-in” states. States that don’t allow bankruptcy debtors to use the Bankruptcy Code for exemptions are called “opt-out” states (Minnesota is an opt-in state). As a result, some of the issues in ordinary bankruptcy cases can be fairly complex. The homestead exemption is one of those areas where the issue can quickly become complicated.
There is a homestead exemption available under the Bankruptcy Code and another homestead exemption available under Minnesota law. The exemption is based on the same concept (saving your home from creditors) but differs in how you qualify. Both laws will use the “equity” in your home to determine whether you qualify for the exemption.
Before we get into those details, it may be helpful to explain what we mean by “equity.” Equity is the net value of your home after your mortgage or other claims against the title. To put it another way, take the current resale value of the home (what you think you could sell it for if you put it on the market), subtract the balance due on your mortgage, and the resulting value is the equity you have in your home.
We should note that for purposes of your bankruptcy case you can’t come up with a rough estimate. You will have to prove to the court that you have accurately valued your property, and your valuation is subject to challenge by other creditors. However, an experienced bankruptcy attorney can help you calculate a fairly accurate number without too much difficulty.
It may be the case that your home doesn’t have any equity - that you owe more on the mortgage than the home is worth, sometimes referred to as being “underwater.” If you are in this position, don’t worry. You may still be able to save your home.
The federal homestead exemption is attractive to homeowners with little or no equity in their homes. In order to qualify for the homestead exemption under federal law, you have to have less than $23,675 in equity in the home. If you have more equity than that, you cannot qualify for the homestead exemption.
The Minnesota homestead exemption is attractive to homeowners with significant equity in their homes, as it allows you to exempt the value of your home up to $412,000.00. This is much more generous than many other states and allows most people to save their homes when they file for bankruptcy.
There are some other important details related to the homestead exemption. First, Minnesota state law says that you can exempt your residence. This may seem obvious, but it can get complicated if you split your time between two homes. In Minnesota, residence means a person’s domicile in which the person intends to remain. The Bankruptcy Code also refers to residence for the purposes of establishing the exemption, but adds a wrinkle: a bankruptcy debtor who is not living at the home can still exempt it as a homestead if the debtor’s dependents live there.
Second, you have to keep paying the mortgage. Again, this may seem obvious. However, our emotions can sometimes cloud our judgment when it comes to our home. As a result, many people try to save the home when they really can’t afford it. It’s important to be completely honest with yourself about the situation, as you may be better off letting the home go to foreclosure.
If you’re worried about losing your home, the bankruptcy attorneys at Kain & Scott can help you face your challenges and build a better future. With decades of experience, we know exactly what you’re going through and how it feels. We work with our clients knowing that bankruptcy is about more than just dollars and cents - it’s about protecting those things and those people that you truly love. If you’d like to schedule a free consultation with one of our experienced bankruptcy attorneys, call us at call us today at 800-551-3292 or contact us online.