Maximize Your Homestead Exemption Protection

Protecting your home starts with your homestead protection.

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 homestead protection.

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 and claimants.

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.

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