While federal law governs bankruptcy, state law will also play a part in your case. In fact, some of the most important state laws you’ll need to know about when are the exemption laws used to protect property in bankruptcy.
In short, you get to keep exempt property. Here’s what happens to nonexempt property.
For more information about the differences between the two bankruptcy types, try reading How Bankruptcy Works: Chapter 7 and Chapter 13.
In Chapter 7 bankruptcy, whether you can keep your home depends, in large part, on your state’s homestead law. Here’s how it works.
Each state has a set of exemptions that protect certain types of property up to certain dollar amount. If the exemption covers your equity, you get to keep the property.
Florida exemption laws protect equity in your residence up to an unlimited amount. So in Florida, no matter how much equity you have in your home, you get to keep it if you file for Chapter 7 bankruptcy. (By contrast, most states don’t offer an exemption that covers near as much.)
Keep in mind that filing this chapter won’t help you if you’re behind on your house payment. While Chapter 7 will stop a foreclosure temporarily, in order to keep your house, you’ll have to be current on your payment when you file, and stay current going forward. Otherwise, your lender will be able to take the action afforded in your contract and under Florida law.
In Chapter 13 bankruptcy, you keep all of your property, including your home. In return, you repay creditors in part or in full 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 as much as they would have gotten if you had filed for Chapter 7 bankruptcy—and it’s the homestead exemption that dictates what they would have received in Chapter 7.
In Florida, because all home equity is exempt, your unsecured creditors wouldn’t get any equity had you filed for Chapter 7. So, even if you own your home free and clear, your monthly payment won’t be affected by your home equity.
You must meet a few requirements before claiming the unlimited homestead exemption. For instance, you can use the unlimited exemption only if the property is your primary residence (you’ll need to be a Florida resident) and you’ve owned a Florida home for at least 40 months.
Before using this or any other exemption, you’ll want to consult with a local bankruptcy lawyer and ensure that you meet all qualification requirements before filing your case.
For more bankruptcy filing tips, see Filing for Bankruptcy in Florida.