Homestead exemptions are a type of property tax relief that allows a debtor to protect equity in a homestead up to certain limits.  It is allowed for homeowners who use their home as their primary residence. If the equity on the homestead property is less than the exemption provided under law, the house can be protected from creditors.  This allows the debtor to file for Chapter 7 bankruptcy without having to sell the house to pay creditors. Typically the exemption is equal to a percentage of assessed value and is limited to a set dollar amount.

Homestead exemptions differ from state to state. For example, the exemption is $10,000 in Oklahoma, $80,000 in North Dakota, and $550,000 in Nevada although this may be limited by the federal cap of $125,000 in some cases.  Kansas, Florida, Iowa, and Texas provide an unlimited dollar value homestead exemption. Some states that do not have a dollar cap on their homestead exemption limit the exemption to a certain area of land, which is much larger in rural areas. For example, in Florida the exemption is limited to half an acre in a city and 160 contiguous acres elsewhere.

A debtor’s homestead exemption is based on the laws of the state s/he lived in for the past two years before filing for bankruptcy. However, if the debtor has moved recently then the home state will be the state the debtor has lived in for the majority of the prior 180 days preceding the two years.

The new bankruptcy law of 2005 places limits on how much equity can be protected, even if the state provides a generous homestead exemption.  Under the new bankruptcy legislation, a debtor cannot exempt more than $125,000 on equity in a residence purchased within 1,215 days (or three years and four months) before filing for bankruptcy. Property owned for more than 1,215 days is not affected this federal law.

Additionally, an absolute $125,000 homestead cap applies if either:

• the court determines that the debtor has been convicted of a felony demonstrating that the filing of the case was a abuse of the provision of the Bankruptcy Code; or
• the debtor owes a debt arising from a violation of federal or state securities laws, fiduciary fraud, racketeering, or crimes or intentional torts that caused serious bodily injury or death in the preceding 5 years.

However, these limitations are inapplicable if the homestead property is reasonably necessary for the support of the debtor and any dependent of the debtor.