Bankruptcy law allows an honest individual that has fallen on hard financial times to obtain a fresh start by eliminating some or all of their debt. The goal of bankruptcy law is not to leave the debtor destitute. To that end, bankruptcy law allows a debtor to keep some or all of their property. Property that the debtor is allowed to keep and that cannot be seized to pay off creditors is called exempt property. In order to protect property from seizure, the debtor must be able to claim the property as exempt by relying on the appropriate federal or state exemption statute.
That said, not all property is deemed as exempt. While one of the goals of bankruptcy is to give a debtor a fresh start and not leave them destitute, another goal of bankruptcy law is to ensure that, if a debtor makes a high enough income or has property above a certain value, that “extra income” or “extra equity” is used to pay creditors some of what they are owed.
Equity is the difference between market value and how much the property at issue still owes. For example, in the case of an automobile, if a debtor owes $18,000 on their car loan and the car’s market value is $20,000, then the debtor has $2,000 in equity in the vehicle. If, on the other hand, the debtor owes $18,000 on the car loan and the car is worth $17,000, the debtor has no equity in the vehicle.
Bankruptcy law allows a debtor to exempt some of their equity in certain assets they own – including homes and automobiles. That said, if a debtor has equity above the exempt amount set by law, then that asset can be seized and sold so that the excess unexempt equity can be used to pay off some of what creditors are owed. Continuing with the vehicle example, here in Florida, the state law exemption for equity on a vehicle is $1,000 per individual. That means that if an individual has equity above $1,000 it is theoretically possible that the vehicle would have to be turned over for sale so that the excess equity can be used to repay creditors.
What about homes? Luckily, Florida homeowners have an unlimited homestead exemption. That means that debtors can claim the equity in their home as exempt regardless of the dollar value of that equity. So how does that come into play in bankruptcy?
In a Chapter 7 bankruptcy – and provided a debtor is current on their home mortgage or mortgages, HOA fees and property taxes – a debtor can use the homestead exemption to protect and keep their home regardless of how much equity they have in their residence. In a Chapter 13 case, a debtor can generally keep their home even if they have fallen behind on their mortgage payments as Chapter 13 is designed to allow debtors to “catch up” on any past due payments. Furthermore, by exempting the full value of a debtor’s home, the Chapter 13 plan payments a debtor must make to unsecured creditors are a lot less than they would be if the debtor could not exempt a significant portion of the home equity.
Bottom line: The Florida homestead exemption is a great tool that allows debtor who are current on their mortgages to keep their homes in Chapter 7 and to limit what Chapter 13 plan payments would be if some of their home equity were not exempt. If you have questions about whether your home qualifies for the homestead exemption feel free to give our office a call. Initial consultations are free.