Since I helped write the exemptions portion of the new bankruptcy laws of Indiana, I often find myself lecturing to groups of professionals about the way the Indiana homestead exemption works. The concept behind the homestead exemption is to keep debtors in their homes wherever possible.
The first step in figuring out the exemption is to see what equity the debtor has in the home. Equity equals the market value of the home minus debts on the home. Debts would include the mortgage, a second mortgage, any liens, etc. If the fair market value isn’t more than what is owed on the home, there is no equity.
When someone files individual bankruptcy in Indiana, and there is considerable equity in the home, the court must decide whether to force a sale of the home to raise money to pay creditors, or whether the debtor will be allowed to keep the home.
That’s where the Homestead Exemption comes into play. There is a dollar amount that can be protected in a Chapter 7 bankruptcy, and in Indiana that amount is currently $17,800 per person. What this means is that, if a person has equity in his home, but that equity doesn’t exceed $17,800 (for married couples, it's $35,600), the bankruptcy trustee will not be able to force a sale of the home in order to pay creditors.
A recent case in Wisconsin brings out an interesting detail about homestead exemptions that applies to personal bankruptcy in Indiana. The court ruled that Mr. and Mrs. M. could not claim a homestead exemption at all. Why?
When the couple filed bankruptcy, the house was in the wife’s name only.
The husband, however, had spent $18,000 of his own money on repairs to the property.
Mr. and Mrs. M. each claimed the full state homestead exemption.
The court ruled that the husband had no “economic interest” in the home, because he was not living there, not paying rent on it, and not in the process of buying it.
Only the wife was allowed to use the homestead exemption.
This case takes me back to a question that is often asked by visitors to the Zuckerberg bankruptcy law offices: How do exemptions work when two people file joint personal bankruptcy in Indiana? The answer is that exemptions apply to each debtor separately. The other very reassuring fact is that, as most good bankruptcy attorneys in Indiana agree, in the real world, almost all people facing bankruptcy own only property that is exempt! That means that, in almost every case, debtors lose no property!
Categorised in: Bankruptcy Indiana
This post was written by Mark Zuckerberg