Many who are considering filing for bankruptcy ask this question: “Can I Keep My House in Bankruptcy?” The answer is you may lose your house after filing a Chapter 7 Bankruptcy Petition if your house has unprotected equity. The homestead exemption is used to protect this equity. It allows you to exempt home equity and protect your house in bankruptcy. When filing bankruptcy, you can choose to use your home state’s bankruptcy exemptions, or the federal bankruptcy exemptions, depending on which state you reside in. Of the 50 states, only 20 states allow you to use the federal exemptions, and Pennsylvania does allow federal exemptions. Pennsylvania does not have a state homestead exemption, so if you are a homeowner filing bankruptcy in Pennsylvania, you may opt to use the federal exemptions if your home has equity.
How Does the Homestead Exemption Work?
The amount of equity in your home is determined by its value minus the balance of mortgages and liens. For example, if your house is worth $200,000, and your mortgage balance totals $175,000, then you would have $25,000 of equity in your home. Without the homestead exemption, the Bankruptcy Trustee could seize your home and force a sale, and after paying off any mortgages, the Trustee uses the remaining funds to pay your creditors. The homestead exemption prevents the Trustee from selling your home provided that all the equity is exempted.
How Much Home Equity Can be Exempted?
Since Pennsylvania does not have a state homestead exemption, you would need to use the federal exemption to protect home equity. The federal exemption protects $25,150 of home equity. This amount doubles to $50,300 if you are married, and if both you and your spouse own the home. If your home equity is not entirely protected by the exemption, in Pennsylvania, if your home is held in “tenancy by the entirety” by you and your spouse, the equity in your residence cannot be used if only one spouse filed the bankruptcy. Tenancy by the entirety basically means that both spouses jointly own the home.
The Homestead Exemption Only Protects Your Principal Place of Residence
You may only use the homestead exemption to protect your principal place of residence. You cannot use it to protect your second home, investment property, rental property that you own as a landlord, or other real estate or land not part of your principal place of residence. However, if you and your spouse live separately, and you both own separate homes, you may each use the federal homestead exemption of up to $25,150 for each home.
The Homestead Exemption Used as a “Wildcard” to Protect Other Types of Property
You may also use any unused portion of the homestead exemption to protect equity in other property. This allows you to protect unexempted equity in motor vehicles, collectibles, livestock, expensive jewelry, and any other personal property. Although these types of personal property are already protected by other federal exemptions, if those other exemptions are not enough to protect that personal property, you may add on the homestead exemption. This “wildcard” use of the exemption is limited to $12,575.
It’s important to consult with a bankruptcy attorney before filing a Chapter 7 bankruptcy to ask: “Can I keep my house in bankruptcy?” Especially if you have equity in your home. Once you have filed bankruptcy, you cannot un-file it later if you find out that the Trustee wants to take your home due to unprotected equity. A bankruptcy lawyer can determine whether your home equity is protected before filing your Bankruptcy Petition.
Contact Starks Law Debt Defense Attorneys to Learn More About Chapter 7 Bankruptcy Relief
If you need debt relief or have questions about Chapter 7 bankruptcy relief, contact us at Starks Law P.C. for a free consultation with an attorney. We listen to the needs and goals of every client and create a legal strategy tailored to that person and their case. We do not believe in the 'one size fits all' legal strategy employed by other firms. Every case is unique, and we plan accordingly.
Representation from Starks Law begins with a simple phone call. We will review the circumstances surrounding your unique situation. After assessing the details, we will form an action plan tailored specifically for your case and goals. Additionally, we will do our best to answer any questions you may have so that you can make a fully informed decision on how to proceed. Take advantage of our Creditor Lawsuit Defense services.