New Jersey Homestead Exemption in Bankruptcy
In certain places, like Texas for example, debtors can protect an unlimited amount of home equity from creditors, as well as the bankruptcy trustee. Unfortunately, for our clients, New Jersey law is at the opposite end of the spectrum. New Jersey bankruptcy exemption laws contain no specific exemption for the homestead, however, there is hope if you want to file bankruptcy and protect home equity. New Jersey allows debtors to choose between state and federal exemptions. A $22,975 federal homestead exemption is available to New Jersey debtors. This means that you’ll need to use federal bankruptcy exemptions if you plan to file chapter 7 bankruptcy and keep your home.
How Homestead Exemptions Work in Chapter 7
Homestead exemptions allow debtors in bankruptcy to shield or “exempt” home equity from the bankruptcy trustee. The homestead analysis is unconcerned with overall home value. The important inquiry for homestead exemption analysis is home equity. For example, your home might be worth $300,000, but if there is an outstanding mortgage balance of $290,000, you only have $10,000 of home equity. It is this $10,000 that comes into play for purposes of the homestead exemption, not the $300,000 overall value of the home. As in the example above, home equity can always be calculated by subtracting the amount of your mortgage from the appraised value of your home. In New Jersey, if this number comes out to $22,975 or below, and you elect to use federal bankruptcy exemptions, the trustee cannot come after your home and try to sell it.
Assuming you can afford to maintain normal monthly mortgage payments, you will be able to file for chapter 7 bankruptcy and retain ownership of your New Jersey home.
A few rules to keep in mind for the homestead exemption:
1. Normal monthly mortgage payments must be maintained if you wish to keep the home.
Regardless of exemptions, it is still possible to lose your home to foreclosure after bankruptcy if you can’t keep up with payments. Filing bankruptcy invokes the automatic stay, BUT, lenders can get around the stay if your mortgage is past due.
2. Homestead exemptions apply to your principal residence only (no protection for investment property).
You can only use the homestead exemption for the home you live in for the majority of the year. Investment or vacation properties cannot be protected. For example, a house at the Jersey shore that you only live in during the summer, would not be eligible for homestead protection.
3. If your home equity slightly exceeds the federal homestead exemption, it is unlikely the trustee will attempt to sell your home as the cost of doing so would likely outweigh the dividend received.
Like everything else, there is a common sense component to bankruptcy. The trustee is not going to sell your home to get after $5 of equity. The normal carrying costs and broker fees apply to the trustee, just as they do to everyone else. If you’re a little bit over the exemption, the trustee may let it slide, or with the help of your bankruptcy lawyer, you can negotiate a cash buyout.
4. If your home equity significantly exceeds the federal exemption, talk to a bankruptcy attorney about your options in chapter 13 bankruptcy.
Two things to mention here. First, if your home is sold because you have non-exempt home equity, you will still be entitled to a check for the federal exemption amount of $22,975. A sale by the trustee does not change the fact that you’re entitled to protect this much in equity. Next, chapter 13 may be a good solution for keeping your home, even if you have non-exempt equity. Learn more about chapter 13 bankruptcy here.
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