The homestead exemption is used in bankruptcy proceedings to protect the equity of a debtor's home. Many people going through bankruptcy are worried about how they will keep their home, or if it is even possible to do so. The good news is that as a New Jersey resident, there are ways for you to protect your home even though there is no homestead exemption under NJ law.
Under Chapter 7 bankruptcy, NJ does offer a list of exemptions that can help you protect your property, but nothing specifically concerning your house. However, in New Jersey, you can opt to use the federal exemptions instead of the state exemptions. You must use only exemptions from either federal law or New Jersey law and you cannot mix and match.
If you are a New Jersey resident who opts to use the federal bankruptcy exemptions, you will be allowed to use the federal homestead exemption. Under the federal guidelines, you can exempt up to $23,675 in equity in your home (for married couples this doubles to $47,350). This exemption applies to real property in NJ, which can include your home, condo, co-op, mobile home, or even burial plots.
You can calculate your home's equity by subtracting your outstanding mortgage balance from the overall value of your home. For example, if your home is valued at $250,000 and you have a mortgage balance of $230,000, then you have $20,000 in home equity. Since this is below the exemption limit of $23,675, you could use the homestead exemption to shield your home from being sold to pay off your debts.
Here are some rules to keep in mind when using the homestead exemption:
1. You Must Keep Up With Monthly Mortgage Payments
If you opt to use the homestead exemption, you will need to be able to keep making on time and in full monthly mortgage payments. The homestead exemption will protect your home from being included in your bankruptcy estate, but it cannot protect you from foreclosure after bankruptcy.
2. Homestead Exemptions Apply to Principal Residence ONLY
You cannot use the homestead exemption to protect an investment or vacation property. You must live on the property for the majority of the year in order for it to count as a homestead. Specifically, the law is defined as "one parcel or item of real or personal property that the person or a dependent…uses as a residence." Because the definition of "residence" is not defined in federal exemption laws, the details matter. Every court will decide on the applicability of the law on a case by case basis.
3. What if my home exceeds the federal homestead exemption?
If your home only slightly exceeds the homestead exemption limit, it is unlikely a bankruptcy trustee will attempt to sell your home since the costs associated with selling the home would likely be more than the potential dividend. The trustee would likely let it pass or allow you to negotiate for a cash buyout.
On the other hand, if your home equity significantly exceeds the homestead exemption, you will need to re-evaluate your options with a bankruptcy attorney. If your home does end up selling in order to use your non-exempt home equity to pay off debts, you are entitled to a check for the federal exemption amount ($23,675). If you want to keep your home in this situation, it may make more sense to file for Chapter 13 bankruptcy.
Bankruptcy exemptions are meant to help those struggling to maintain their assets while getting rid of debt and finding a new path forward. Veitengruber Law can advise which set of exemptions are right for you and help you find ways to protect your home and your other assets. If you're feeling unsure of which exemptions are the best way to go, give us a call and we will help you!