Debtors often ask us what will happen to their home if they file for bankruptcy protection.  Fortunately, federal bankruptcy law and most states provide for what is often called a “homestead exemption”.  A homestead exemption acts as a shield against the claims of certain creditors.  It does this by protecting up to a specific dollar amount in real property.  Homestead exemptions are particularly important for debtors with equity in their home.  On the other hand, where a consensual lien on real property, such as a mortgage, exceeds the home’s value, the homestead exemption does not apply since there is usually no equity in the home to protect.

There are certain requirements for the homestead exemption to apply.  For instance, the real property typically must be kept as the debtor’s residence.   And depending on the state where the debtor resides, the debtor may elect to apply the federal homestead exemption over their state’s homestead exemption.  As of April 2010, the federal homestead exemption was $21,625.  Federal exemptions are not generally available to Oregon residents.  However, Oregon has protected much more home equity for its residents.

Homestead exemptions differ greatly among states.  Some states offer lucrative exemptions.  In Florida, for example, there is an unlimited homestead exemption.  Other states offer no homestead exemption of any type.   What is more common is for states to have a homestead exemption up to a specific dollar amount or area of land.   The Oregon homestead exemption is $40,000 for an individual and $50,000 for a husband and wife filing jointly.

Debtors should inquire into their state’s laws regarding homestead exemptions before filing.   This includes whether the debtor can use the federal bankruptcy homestead exemption as opposed to their state’s homestead exemption in the event that the exemption provided by federal bankruptcy law is greater.