Residents may have heard of the idea of “homestead exemptions. And, they may be more familiar with the concept in the context of the taxes. Nonetheless, a more important use of the idea may be when filing bankruptcy.

Bankruptcy exemptions are used by debtors to carve out pieces of property that can be shielded from debtors. As always, debts that are secured by property, such as land under mortgage, or a car purchased with a car loan, remain subject to repossession, even in bankruptcy. However, a homestead exemption can, in some cases, be the difference between keeping the family home, and seeing it liquidated to pay one’s debts.

Tennessee law requires those filing for bankruptcy to use the state’s bankruptcy exemptions, unlike some states that allow debtors to choose between federal and state systems. For the homestead, Tennessee allows $5,000 in exemption for a single person, $7,500 for a couple and $25,000 or $50,000 for a person or a couple, respectively, who have custody of minor children.

In a Chapter 7 case, the trustee will take legal title to the debtor’s property, and determine if there is more equity in the house than the exemption claimed. If not, the trustee usually “abandons” the property and it is returned to the debtor. If there is, the trustee will sell the property and pay expenses and liens, and then give the debtor the amount of exemption, with the rest, if any, paid to creditors.

In a Chapter 13 situation, the debtor must make sure that his or her repayment plan gives creditors at least as much as they would have gotten in a Chapter 7 case, taking into account the homestead exemption. The debtor will generally be able to keep the home if he or she pays enough to meet this standard.