Homestead Exemptions in Bankruptcy After the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)
Released: 2011-08-25T00:00:00

Introduction

Prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the amount that a debtor in bankruptcy could exempt as equity in a homestead was generally limited by two factors: (1) whether the domiciliary state allowed the debtor to choose between the federal and state exemptions and (2) the amount the domiciliary state allowed as an homestead exemption. A third factor was added by BAPCPA in cases in which a debtor had purchased the property within approximately three years and four months before filing a petition for bankruptcy. Additionally, BAPCPA restricts debtors' options for determining their domiciliary state and, thus, the state exemptions that will apply. Prior to BAPCPA, an individual anticipating filing for bankruptcy protection might, shortly before filing for bankruptcy, move to a state whose exemptions were more favorable than those in the state where the individual was currently living and benefit from the more favorable exemption amounts.

This report discusses the federal homestead exemption, the effect BAPCPA has on a debtor's homestead exemption and, in Table 1 , provides a survey of the current homestead exemptions in the fifty states and the District of Columbia. The table also indicates whether state residents may choose between the state and federal exemptions.

The Federal Homestead Exemption

Section 522 of the Bankruptcy Code addresses the extent to which an individual debtor may elect to exempt equity in certain property from becoming part of the bankruptcy estate. Property exempted from the bankruptcy estate is not available to satisfy creditors. Among the exemptions explicitly provided in the Bankruptcy Code—the federal exemptions—are a homestead exemption in the amount of $21,625 and a "wildcard" exemption of $1,150 that can also be applied to the homestead if the debtor chooses so long as the federal exemptions are available to the debtor.

To the extent allowed under state law, the Bankruptcy Code allows debtors to choose between using the federal exemptions or those available under applicable state law. This is an "either/or" choice—debtors are not allowed to choose to use some state exemptions and some federal exemptions. When a petition is filed jointly by husband and wife or where the individual cases of a husband and wife are ordered to be jointly administered, each spouse must choose the same set of exemptions. However, debtors in many states have no choice to make because their state law prohibits the use of the federal exemptions. These federal exemptions are available to debtors only to the extent they are not prohibited by the applicable state. Nonetheless, while the homestead exemption in many states is greater than the federal homestead exemption, provisions were introduced in BAPCPA that impose limitations on the extent to which debtors can avail themselves of a state's homestead exemption.

BAPCPA's Effect on Homestead Exemptions

BAPCPA established a maximum homestead exemption for all debtors in all states unless a minimum period for property ownership was met. Subsection 522(p) of the Bankruptcy Code generally prohibits exempting an equity interest in the property that was acquired by the debtor during the 1215-day period immediately preceding the bankruptcy filing to the extent that the interest exceeds $146,450 in value. This limit may also apply in some cases in which the debtor has been convicted of a felony or has a debt resulting from violations of securities laws, fraud in a fiduciary capacity, or as the result of certain acts that caused serious physical injury or death. Additionally, if any part of the debtor's value in the residence is attributable to property disposed of in the 10-year period preceding the bankruptcy, the debtor's value in the residence must be reduced if all or part of the value in the previously owned property could not have been exempted in bankruptcy if the property were still owned when the debtor filed for bankruptcy.

BAPCPA also restricts debtors' options for determining their domiciliary state, which may effectively place limits on their homestead exemption. Debtors must have lived in their current state for at least two years before they are eligible for that state's exemptions. Debtors who have not lived in the same state for at least two years prior to filing for bankruptcy must look back at where they lived for the 180-day period immediately preceding that two years. If the debtor lived in more than one state during that 180-day period, the domiciliary state is the one in which the debtor lived for the greater part of that 180-day period.

Thus, through the changes made to § 522, BAPCPA limits the extent to which a debtor might plan for bankruptcy and maximize exempt assets. To effectively choose which state's exemptions will apply, a debtor must move to the chosen state approximately two years before filing for bankruptcy. To plan for a homestead exemption of more than $146,450, the debtor must acquire the interest approximately three years and four months before filing a bankruptcy petition.

Scope of the Survey of Homestead Exemptions

State laws were reviewed on both the Westlaw and LEXIS computer databases. In the table, the entry for each state first provides a brief synopsis of the homestead exemption available to debtors in bankruptcy as well as the extent to which debtors may elect to use federal rather than state exemptions. In some cases, de minimis "wildcard" exemptions that may be used for either real or personal property are noted, but the survey is not comprehensive with respect to them. They are more likely to be noted when a state has an extremely limited homestead exemption. Relevant excerpts of the state's statutory language is provided after the synopsis. Except as it is included in the excerpted statutory language, the survey does not address whether there is an exemption for proceeds after the sale of a homestead, nor does it address exemptions established by case law for homesteads held as tenancies by the entirety. Except as noted, state law provisions that constitute exceptions to the homestead exemption are not included in the survey.