What are Homestead Protection Laws?
Nearly every state has a homestead protection law, designed to protect individual property owners -- including but not limited to homeowners -- from losing their primary residence during hard times. Small property owners who are unable to meet the demands of their creditors still need a place to live even if they have declared bankruptcy. Homestead laws allow an individual to register a portion of his or her real and personal property as a "homestead," thereby making that portion of the individual's estate off-limits to most creditors. The idea behind these homestead laws is the preservation of the family farm, home, or other assets in the face of severe economic conditions.
Property owners typically invoke homestead laws when they file for bankruptcy, often based on the amount of equity they have in the property. Different states have different criteria, but usually base the exemption amount on acreage, equity amount, or both.
For example, suppose an Illinois homeowner has lost her job and can no longer afford her mortgage payments. She eventually files for bankruptcy and claims the maximum $15,000 exemption on her equity. Although she owes money to her creditors, the exemption prohibits them from seizing her home. However, she may be forced to sell her home if she owes past due Illinois state taxes.
See FindLaw's Bankruptcy section for more articles related to homestead laws, including Bankruptcy Exemptions: Chapter 7 and Debt Discharge and Property.
State Homestead Laws at a Glance
While similar in function, there are plenty of differences among the various state homestead laws. A few states offer exemptions of more than $100,000, while some state exemptions are as low as $5,000. Most states offer a generous exemption limit for agricultural land, but these limits also vary quite a bit.
Also, state laws tend to differ in the types of property that may be exempted. For instance, Arizona law allows a $6,000 exemption for household furniture and appliances, while Delaware allows a $15,000 exemption for "tools of trade" (such as a building contractor's pickup truck and power tools).
What May be Protected Under Homestead Laws?
As noted above, state homestead laws are all fairly unique. In addition to real property, such as a house or a farm, homestead laws may exempt the following (check your state law for specifics):
Federal Homestead Protections
Property owners may elect to choose the federal homestead exemption instead of (but not in addition to) state homestead protections if federal law offers more protections. The federal exemption amount is $22,975 (as of 2015) and may be applied to burial plots and mobile homes as well as houses and condos. Additionally, married couples may double this exemption to $45,950.
However, keep in mind that federal law requires a 40-month residency in the property prior to declaring homestead protection. Any previous property owned in the state, if sale proceeds were used to purchase the current property, count toward this requirement.
If you are having financial difficulties and need more information about the homestead protection law in your state, contact a debtor/creditor attorney near you.
