Homestead Exemption

What is a Homestead Exemption?

A Homestead is, quite simply, a legal device that protects a person’s residence (or a portion of it) from creditors. A judgment creditor cannot levy on the homestead portion of a person’s residence. The amount of homestead protection differs widely by state. Texas and Florida offer unlimited homestead protection (unlimited in value, but limited by acreage), while Alabama offers a meager $5,000 homestead exemption for single persons and $10,000 for a married couple.In practice, a creditor attempting to levy on an Alabama residence can reach all the equity (after mortgages and liens) except for the homestead protected amount. In the event of a forced sale of the residence, the ousted creditors would receive the homestead exemption in cash. Homestead protection is afforded automatically in most states, but it’s always a good idea to file appropriate papers to claim the homestead. Contact the county clerk, or a lawyer, to make absolutely sure that you enjoy homestead protection for your home.

Erosion of Homestead Protection by New Bankruptcy Reform Act

Recent changes to the Bankruptcy Code eroded the protections afforded by homestead exemptions in “debtor states” such as Texas and Florida.

The bankruptcy reform imposed a limitation of the state homestead exemption in bankruptcy to $125,000, regardless of state law providing for a larger or unlimited exemption (thereby circumventing Texas’ and Florida’s unlimited exemption). This limitation applies to homesteads that are acquired within a 1215-day (3 years and 4 months) period prior to the filing of the bankruptcy petition. This provision precludes the rare but effective practice of “exemption shopping” by desperate creditors. Exemption shopping is a practice whereby debtors hastily reorganize their financial affairs in a pro-debtor state to foil creditors.

Rollovers of exempt homestead interests are not allowed even if those interests were exempt in both states. Thus, the debtor who moves from Texas to Florida will re-trigger the 1215 day period, despite the fact that both states have unlimited homestead exemptions.Nevertheless, homestead planning is still an effective asset protection device.

Michael Spadaccini

Michael Spadaccini is the author of 8 books on self-help legal matters such as, Ultimate LLC Compliance Guide: Covers All 50 States (Ultimate Series), Ultimate Book of Forming Corps, LLCs, Partnerships & Sole Proprietorships, and Ultimate Guide to Forming an LLC in Any State, Second Edition (Ultimate Series).

You can view his Amazon Author Profile Here.