They say a man’s home is his castle, but is that really true?  Most states provide some sort of creditor exemption for a personal residence.  Each state has different rules and limits for what that exemption is, and you should check with an APS™ rated advisor to determine just how much the homestead exemption is in your state.

The homestead exemption came from public policy concerns to protect the family.  The theory is fairly simple, the legislatures wanted to protect some portion (in some states it is unlimited) of the family residence so families (even those riddled with debt and hounded by creditors) have some safe haven.

-Interest protected

The homestead exemption is a statutory right to protect “homestead property.”  This is typically the real estate owned by a person as his/her personal residence.  Again, the states vary on their definition; so be sure to check with your local advisors to make sure the piece of property you are concerned about is covered.

Interestingly, 21 states now specifically include mobile/manufactured homes.  Also of interest is that some states do not require that a client occupy the home or even have the intent to occupy the home to claim homestead.

-Homestead exemption value

The amount of homestead exemption in each state varies widely.  States such as Rhode Island, Delaware, New Jersey, Pennsylvania, and the District of Columbia have no homestead exemptions.  States such as Texas, Florida, and a few others have unlimited homestead exemptions (with some limits under new bankruptcy laws).

Some states have a different amount for married couples, some vary the amount by the number of dependent children an individual or couple has, some states raise the exemption if someone incurs significant hospital or medical debts, and some states increase the exemption in the case of bankruptcy.

We would say a general number for states that do not have an unlimited exemption and those that have no exemption is between $5,000 and $50,000 (depending on if you are married or single).

-Debt exclusions

Certain debts in all states are excluded from being covered by the homestead exemption. Almost all states exempt out consensual liens, mechanics liens, and property taxes from being covered by the homestead exemption.   Many states now are adding to the list of exemptions debts for child support or spousal support.  The IRS is also a creditor that does not fall under the homestead exemption.  So, if you owe a significant amount of taxes you cannot pay to the IRS, they can take your home notwithstanding the state allotted homestead exemption.

-Procedural issues

It does little good for someone to have a homestead exemption if the property can be sold before an exemption is asserted.   In many states (18), the homestead exemption is automatic.

Some states allow for a waiver of the homestead exemption (which almost universally requires the spouse’s consent if you are married).  The homestead exemption, if limited, will not always prevent the sale of your homestead property.  The rules for how homestead property is sold, even when the homestead exemption is applied, vary dramatically.   Sometimes a house can literally be sold for any price above the homestead exemption, which could create a scenario where the homestead is sold for thousands less than its fair market value.  The amount of the exemption will still be reserved for the homeowner, but the rest of the profit from the sale of the home can go to pay creditors.

-Practical example of how the homestead exemption would work if sued

Assume a patient sues Dr. Smith, and a jury verdict comes back for $1,000,000 over the malpractice limits he has with his medical malpractice carrier.  Further, assume that Dr. Smith is single and has a home worth $1,000,000 with $500,000 in equity.

If Dr. Smith lived in a state with an unlimited homestead exemption, the patient through the collection process could not force a sale of the $1,000,000 home to satisfy the judgment.

If Dr. Smith lived in a state with NO homestead exemption, the patient through the collection process could potentially force a sale of the $1,000,000 home to satisfy the judgment.

If Dr. Smith lived in a state with a $50,000 homestead exemption, the patient through the collection process could potentially force a sale of the $1,000,000 home to satisfy the judgment. In this last example, the patient/creditor could receive all the proceeds from the sale of the house above $50,000.   That first $50,000 is the exempted amount and stays with Dr. Smith.

Conclusion on Homestead Exemption

Having a homestead exemption in most states (the states without an unlimited exemption) does a high-end client with the potential for million-dollar creditors (your patients) very little good.

If you would like to know what the laws are with your state’s homestead exemption, please see contact a locally “Rated” APS™ advisor how can help you protect your home’s equity.