Homestead Exemption in a Chapter 11 Case

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The federal homestead exemption is a provision of the bankruptcy code that allows an individual who is filing for certain types of bankruptcy to keep some of his or her equity in his home. The federal homestead exemption generally applies to chapter 7 bankruptcy. Chapter 11 bankruptcy is a different type of bankruptcy, and is widely known as a business bankruptcy. Because of the purpose and structure of chapter 11, the federal homestead exemption doesn't really come into play.

Understanding the Federal Homestead Exemption

When you file a chapter 7 bankruptcy, assets that aren't exempt must be turned over to a bankruptcy court or trustee. The assets will be sold in a sheriff's sale or bankruptcy sale to the highest bidder and money collected from the sale is paid out to creditors. After this money is distributed among the creditors that have claims, the remaining balance on non-exempt debts is forgiven.

Certain assets, however, are protected when you file a chapter 7. These include:

  • Retirement accounts
  • Tools of the trade (i.e. things you own that are an essential part of doing your job)
  • Some home equity, under either federal or state homestead exemptions. 

Understanding Chapter 11

Chapter 11 bankruptcy, on the other hand, is entirely different from chapter 7. While chapter 7 is a liquidation bankruptcy, chapter 11 is a reorganization bankruptcy. A business (like a corporation) enters into a chapter 11 when it is under too much debt. The debt and the business itself are restructured and put under the control of a trustee. The purpose of the chapter 11 is to allow the business to stay open and to allow the business to become more profitable.

Assets are not seized under a chapter 11, and the business in a chapter 11 most likely does not own a home (although it may own a building or other real estate). As such, the homestead exemption is not generally relevant. 

Getting Help

Understanding the different terms and requirements of each different chapter of bankruptcy is not a simple matter. It is rarely a good idea to try to file any chapter of bankruptcy on your own. A qualified bankruptcy lawyer can help you to determine which chapter of bankruptcy is right for you and can explain each step of the process, from what exemptions you have or assets you can keep, to what paperwork must be filed with the court for your bankruptcy to proceed in a timely manner. 

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