Protecting your home starts with your
Five states completely homestead protect the family home; however, most
states only partly creditor-shield the home. States with homestead laws
vary greatly in how much home equity they protect. Five states have no
The homestead laws apply only to your home or primary residence, a property
that you own and occupy as your home, and that you consider your domicile.
But which specific "residences" qualify for homestead protection
depends upon your state statutes and court rulings. For example, some
states shelter only single-family homes, not duplexes or multi-unit structures.
Will your state law's homestead protect a mobile home or houseboat
that you use as your "home?" Interesting question!
The next question is how much home equity will your homestead laws protect?
Compare the statutory protection against your home equity. Subtract the
mortgages against your home's fair market value. For example, a $300,000
home with a $150,000 mortgage has $150,000 equity. If your state homestead
protects $20,000, then you have $130,000 equity vulnerable to lawsuits
Follow the procedural requirements to claim homestead protection. Each
state sets its own requirements for homestead protection. Some states'
residents must file a declaration of homestead in a public office. Other
states impose a residency period before they grant homestead protection.
Don't assume your home is protected. Let your attorney help you comply
with your state's procedural formalities. Some states permit only
the head of the household to claim homestead protection; however, most
states extend homestead protection to either or both spouses.
Nor will your homestead exemption shield your home against every creditor.
Homestead laws ordinarily protect the home only against debts incurred
after you claim homestead protection. Moreover,
certain creditors can override your homestead protection:
The IRS (and some other federal agencies following special procedures).
If you owe federal taxes or are sued by the SEC or the EPA, for example,
you can lose your home, regardless of your state laws. Your homestead
laws may or may not protect your home against the state tax collector.
Ex-spouses in divorce or family members challenging their inheritances.
Plaintiffs with claims for intentional torts (libel, fraud, deceit, etc.).
Lenders holding a consensual lien (a mortgage) against your home, or creditors
to whom you specifically waived your homestead rights under a contract.
Your goal is to maximize your homestead protection. Some states let spouses
apportion their exemption so the liability-prone spouse may claim more
of the exemption. If your state has an unlimited or large homestead exemption,
you might pay down your mortgage with exposed cash (to convert the cash
into protected equity), or use the cash to improve your property.
Some debtors jurisdiction shop and relocate to a state with broad homestead
protection. But a word of caution: You must own and reside in your home
for 40 months before you file bankruptcy or your homestead protection
caps at $146,450; regardless of your state law. Converting unprotected
cash to increase your homestead-protected equity is another complex area
of law that relies largely on your state laws plus bankruptcy law, which
has, under the new bankruptcy laws, greatly reduced your strategic options.
Homestead protection can be illusory. For example, if you now own a $30,000
home equity with a $30,000 homestead exemption, your home is now fully
protected. But will your home be protected in the future as you build
equity (assuming your home appreciates) while you reduce your mortgage?
If you're sued some years from now, you will have substantially more
equity to lose. Your present creditor can sit on their recorded judgment
against your home until there's enough exposed equity to satisfy their
claim. Because of its limitations, the homestead exemption seldom sufficiently
protects the family home. The best strategy is to periodically refinance
your home so that your mortgages plus your state homestead exemption leaves
no exposed equity available to creditors.