Whether you file a Chapter 13 or Chapter 7 bankruptcy, your Kentucky bankruptcy exemptions allow you to keep homes, autos, and other property. You can use either the state’s homestead exemption of $5,000 or the federal homestead exemption of $27,900. However, the federal exemptions are larger, so you should never use our Kentucky exemptions. A few states, like Florida and Texas, have significant state exemptions and don’t use federal exemptions.
If you run out of a homestead exemption, you can increase your Chapter 13 plan payments to pay for the non-exempt equity. Remember: a Chapter 13 plan must repay the same amount a Chapter 7 would have repaid. You can keep a home or an auto if you have fallen behind on the payments, but you have to catch up on the secured debts within a 5-year plan.
Understanding Homestead Exemptions
A homestead exemption allows homeowners to retain a small amount of equity in their home. In 2024, this homestead exemption amount was 27,900 per person on the deed. But this has to be your residence. The homestead deduction does not protect a vacation home or business property. Some states require a homestead declaration to claim this exemption.
If you don’t use part of the homestead exemption, you can use up to half of the unused homestead exemption to keep any property as a wildcard exemption. Assets you cannot exempt are referred to as non-exempt.
The homestead exemption protects your home and is homeowners’ primary asset protection tool. It allows you to shield a certain amount of equity in your primary residence from creditors, ensuring you can keep your home. Kentucky allows federal exemptions, but every state seems to have a state’s homestead exemption, which may be more or less than the federal homestead exemption. Federal law imposes you to live in your state for at least 730 days before filing to qualify for a homestead exemption. This prevents people from moving from a state with a small homestead exemption amount to a state with a better homestead exemption to keep the asset.
What Is the Bankruptcy Homestead Exemption?
The homestead exemption is a bankruptcy exemption that allows individuals to protect a certain amount of equity in their primary residence from creditors in the event of bankruptcy. This exemption is designed to help homeowners keep their homes and maintain stability during a difficult financial period. The homestead exemption is available in Chapter 7 bankruptcy and Chapter 13 bankruptcy cases. By shielding a portion of your home’s equity, the homestead exemption ensures you keep your home. Bankruptcy exemptions allow you to keep your home, not a Taj Mahal.
Using the Federal Homestead Exemption to Keep Property
In your schedules, you have to declare the major items you own. Trustees do not expect you to list every CD you own separately. But they do expect you to list significant items that would be worth over 700 dollars or so. If you list an item, you must exempt it to keep it. When you fail to list or try to transfer property, you may not be able to be exempted. If a married couple jointly owns a home or auto, they can both claim exemptions.
In addition to the homestead exemption, you may use a wildcard exemption to protect other valuable assets. About 30 other exemptions allow you to keep a professional library of books, tools, cars, household goods, and most personal property to start over on a new budget. Nonexempt items can be sold for the benefit of unsecured creditors.
Losing property is rarewith all the other bankruptcy exemptions, but with the significant increases in home values, Chapter 13 has become an important option to allow you to keep a home when it would have been sold in Chapter 7.
State Homestead Exemptions
State homestead exemptions vary widely. In some states, the homestead exemption is based on the median home value; in others, it is a fixed amount. You must understand your state homestead exemption laws to determine how much equity you can protect. The bankruptcy exemptions also have annual adjustments.
Transferring assets means you lose the exemption.
People often attempt to keep assets by giving them away to a relative or selling them for a low price before they file bankruptcy. Often, an exemption would have allowed you to keep the car or boat. Exemptions only enable you to keep your assets. As soon as you transfer it for less than it’s value, you commit bankruptcy fraud and lose the ability to use the exemption.
Worse, the person you gave the asset to has to return it. It is possible to have your case dismissed, have a forced sale, or be barred from filing in the future as a penalty for fraud. The bankruptcy trustee will take improperly transferred or nonexempt property.
The Debtor is required to use his best efforts to repay. The Debtor and the Creditors must tighten their belts to have a reasonable plan. Filing for bankruptcy requires a deeper understanding of how everyone must be honest and reasonable in a bankruptcy plan.
Calculating your Federal Homestead Exemption in Bankruptcy
Your home equity is the value of your home minus the mortgage, taxes owed on the house, liens, and other debts on the home. In Chapter 7 bankruptcy, understanding how to calculate your home equity is crucial to determining the applicability of the homestead exemption. Federal law allows a homestead exemption for each person on the deed.
So a 450,000 home with a 350,000 mortgage may have 7,000 in taxes, a judicial lien where the husband was sued for an auto accident for 25,000, and the equity would be 500,000-350,000-7,000-25,000= 68,000. A married couple who are both on the deed double the exemption to a 55,900 exemption limit. You don’t need a joint bankruptcy to use these exemptions or to file to save a home.
The house would probably not be sold in a Chapter 7 bankruptcy because the 12,000 above the 55,900 exemption would not be enough to pay the home’s sale cost. A 6% real estate broker fee and closing costs would have been over 21,000. There would be nothing to pay creditors. The homestead exemption in bankruptcy is critical for protecting your home equity from the Trustee and creditors.
How Does the Homestead Exemption Work
The homestead exemption works differently in a Chapter 13 bankruptcy case than in a Chapter 7 bankruptcy. In Chapter 13, the trustee does not normally sell non-exempt assets to pay creditors. Instead, the debtor can create a repayment plan outlining how to pay for any nonexempt equity over time.
This approach allows debtors to keep their homes while still fulfilling their obligation to repay creditors.
So, what affects a Chapter 13 bankruptcy plan payment?
The three considerations that affect how much you must repay are
- A debtor’s disposable income
- How much priority debt and catching up arrears on retained homes and cars?
- Your non-exempt equity in retained assets.
If you have sufficient money in your budget to make a reasonable repayment to creditors, that discretionary income is your Chapter 13 plan payment. The plan is not feasible if you can’t afford a reasonable repayment.
Priority debt, such as income taxes less than three years old and child support, must be caught up in Chapter 13. Secured debts such as home and car loans must be caught up. So the arrearage can increase your plan payment.
Finally, your 13 must repay what a Chapter 7 would have. So if Chapter 7 would have sold the home and paid 12,000 to creditors, then Chapter 13 must repay 12,000 to have the plan confirmed.
Resources for Bankruptcy
Getting Started with Your Bankruptcy
Louisville Kentucky Bankruptcy Forms
Getting Your Fresh Start Through Bankruptcy
Your Fresh Start on a New Budget with Bankruptcy
Nick Thompson – Kentucky Foreclosure & Bankruptcy Attorney
If you are considering bankruptcy, don’t delay because timing is crucial. Our debt relief law firm is here to help you. So, contact my office right away to start the conversation. Nick C. Thompson, Bankruptcy Attorney: 502-625-0905.
