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How does the homestead exemption apply to bankruptcy filers?

Last week we discussed the bankruptcy of football coach John L. Smith. In the context of that conversation we also discussed exemptions. In general, Tennessee consumers, like all those who file, must repay a portion of their debt in bankruptcy, either through repayment or liquidation. The laws, however, do carve out bankruptcy exemptions that allow people to keep certain property. Among these, the homestead exemption is often the most important.

State and federal law define the type of personal property that is exempt in bankruptcy. While each of the 50 states has its own classification of exempt property, both federal and state homestead exemptions exist. How these various exemptions actually affect the family home depends both upon how a person files and the state in which the individual lives. It is important to learn the effect of these exemptions before choosing how to file in Tennessee.

In Chapter 13 bankruptcy, homeowners often can retain their home. How much a person must pay their creditors in order to stay in their home depends on a number of factors, including the person's income and how much is owed on the home. Usually, the homeowner will include forthcoming and missed payments in the Chapter 13 payment plan.

Under Chapter 7 bankruptcy, on the other hand, each state has its own set of laws regarding how much equity in the home is exempt from the bankruptcy. Under federal law, the homestead exemption is limited to around $20,000.

If the amount of equity in the family home exceeds the amount of the exemption provided under state or federal law, it is possible for creditors to require that the home is sold to repay debt. If the filer is within the exemption amount they can typically keep the home. The person, however, is still responsible for their mortgage and the lender can still foreclose if the borrower falls behind. Understanding the specifics of a person's financial situation is essential to deciding what type of debt relief option is best to match their situation and goals.

Source: Fox Business, "Protect Your Home if Bankruptcy is Coming," Tanisha Warner, Oct. 10, 2012

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Mark T. Young & Associates
2895 Northpoint Blvd.
Hixson, TN 37343

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