What is a Bankruptcy Homestead Exemption?

The bankruptcy homestead exemption allows people filing a chapter 7 bankruptcy to keep some of the equity they have built up in their houses. To understand this, it is important to understand what goes on in a chapter 7 bankruptcy:

• In a chapter 7 bankruptcy, all assets that are not covered by some type of bankruptcy exemption are turned over to the trustee and bankruptcy court
• Those assets are then sold in a bankruptcy sale, the purpose of which is to raise money to pay back some of the debt owed
• The money is then paid to the creditors and the remaining balance of debts that are eligible for forgiveness is discharged

As such, the homestead exemption is important because it means that some of the equity in your house isn't considered an asset that will have to be turned over to the court to be given to your creditors. Equity is the amount of your house that you own. For example, if you have a home valued at $200,000 and you only owe $50,000 on that house, you have $150,000 in equity in that house. 

Most states have a different rule for how much equity you may keep under the homestead exemption. There is also a federal homestead exemption that can be used if the state where you are filing doesn't have their own homestead exemption. As a general matter, those who are married and filing a joint bankruptcy or those who are over the age of 60 (or 65, depending on the state) have a larger homestead exemption available to them.

To get help understanding what your homestead exemption is based on where you are filing bankruptcy, or to get assistance in any aspect of your bankruptcy filing, you should strongly consider speaking with a lawyer.