While bankruptcy is governed by federal law, state laws do play an important part of your bankruptcy case. One of the most important state laws are the exemptions you can use to protect your equity from being used to repay some of your debts in a chapter 7 bankruptcy case. Exemptions also play a role in determining how much of your debts must be repaid under a chapter 13 bankruptcy plan.
See How Bankruptcy Works: Chapter 7 and Chapter 13 to learn more about the differences between the two types of bankruptcy.
In Chapter 7 bankruptcy, whether you can keep your home depends, in large part, on the applicable homestead exemption. Here's how it works. Each state provides a set of exemptions that protect certain types of property up to certain amounts. If your equity is covered by an exemption, you get to keep the property. (To learn more about exemptions, see Bankruptcy Exemptions -- What Do I Keep When I File for Bankruptcy?)
Florida exemption laws protect equity in your residence up to an unlimited amount. (Most states protect only a certain dollar amount -- ranging from nothing to over one hundred thousand dollars.) This means that no matter how much equity you have in your home, you get to keep it if you file for Chapter 7 bankruptcy.
In Chapter 13 bankruptcy, you keep your property, including your home. In return, you repay creditors (some in full, some in part) through your repayment plan over three or five years.
The homestead exemption plays a role in Chapter 13 bankruptcy because your unsecured creditors must receive at least what they would have gotten if you had filed for Chapter 7 bankruptcy. What they would have gotten in Chapter 7 is dictated by the applicable exemptions.
In Florida, since your entire home is exempt, your unsecured creditors would not get any equity in Chapter 7. This factors into your monthly payment -- which will be lower than if you had a big chunk of nonexempt equity in your home.
There are a few requirements to claim that unlimited homestead exemption. You can use the unlimited exemption only if: