*Homesteading the Homestead*
The Last Line of Defense
By: Legis
6 July 2010

I previously wrote an article about the importance of liability insurance in protecting one’s assets. Let’s now consider the situation where the individual had insufficient insurance and now has a judgment against them in excess of the limits of insurance (of course, there are many situations beyond personal injury whereby a person is exposed to a potentially large judgment such as professional malpractice, employment and sexual discrimination, business loan default, business torts and so on.).

A man’s home is his castle. In ancient times, the lord protected his manor from invaders with tall walls and moats. Today’s invaders not only want to take the possessions in the castle, but some also want the castle itself. The latter won’t come with knives or guns, they come with a judgment in hand and the constable or sheriff at their back. In the event of a judgment, the creditor can remove you from your home and force a sheriff’s sale (or judicial sale) with the proceeds applied to the judgment. There is protection, however. A homestead exemption protects a given amount of the property’s equity from creditors. A properly recorded homestead exemption can make it more difficult for the creditor to force a sale, protect at least a portion of the sale proceeds, and in some cases, there is absolute and unlimited protection. With each state having different homestead laws, it would be a colossal undertaking to analyze them all here. Instead, I’ll give a brief explanation of my licensure state, Nevada, and then give a few general considerations. Please review your state’s homestead laws.

Pursuant to Nevada Revised Statute § 115.010, a properly claimed homestead is not subject to a forced sale by a creditor unless the property has more than $550,000 in equity (NOT value). In that event, the first $550,000 of equity sale proceeds goes back to the debtor and those proceeds are not subject to subsequent seizure or garnishment. The creditor will apply the excess amount of the sale equity (above $550,000) to the judgment (overages are returned to debtor). No forced sale can be executed unless the sale price is at least $550,000 in excess of any and all mortgages or encumbrances (thus, the equity). By way of example, consider a debtor’s home with a value of $800,000 and a total $100,000 in mortgages. Let’s say a creditor has a $200,000 judgment against debtor. This debtor has $700,000 in equity and the sale can proceed. The first $100,000 goes to the mortgagor, the next $550,000 goes back to the debtor and the remaining $150,000 goes toward satisfaction of the judgment. If however, the home were only worth $500,000, no sale can be executed and the debtor retains the property. There are exceptions, however, to the types of creditors that are limited by the homestead laws.

Some states like Texas, Florida, Iowa, Kansas and Oklahoma are (or almost are) unlimited in exempted amount while other states, like Nevada, provide significant exempted amounts. In the past, debtors, in an effort to protect their assets, would buy an expensive home in Florida, for example, and claim a homestead, thus shielding their assets from creditors. In response to this practice, Congress passed bankruptcy legislation that requires the debtor to have lived in the property for more than 1215 days (3.3 years) prior to filing bankruptcy in order to receive the full benefit of the state’s homestead exempted amount. If the time requirement is not met, then the Federal bankruptcy exemption of $125,000 of equity will apply (time lived in a previous home might be counted if sale proceeds are used to purchase the current home). On the flip side, Federal bankruptcy laws can offer more protections than state law by providing $125,000 in exemption. Of course, these issues only apply once the debt is subject to a bankruptcy proceeding whether voluntary or involuntary.

If your state offers homestead protection, please make sure you have taken all steps to comply with the law. If a form is required, they are simple, often one page. Typically, you can get forms for free at your county recorder’s office or your board of realtors. Of course, you can hire a lawyer if the process seems daunting. There is often a small charge in recording the homestead with the recorder. Should you decide self-help, you’ll need your property’s legal description which you can get from your deed. Although you shouldn’t wait to homestead your property, some states, like Nevada, allow you to declare at anytime prior to the sheriff’s sale.

So I ask: is your castle protected?

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