In most cases when you purchase a home, you know in advance whether you will live in the property, or whether you are buying the property to rent out or flip for a quick sale. In some cases, the role of the property may change over time.
Sometimes, people may live on a piece of property and then later move out but keep the property with the intention of renting it out. In fact, during the foreclosure and real estate crisis a few years ago, many people were persuaded to transfer their home to land trusts or to put property in corporate names. What they did not know was that by doing so they were losing valuable homestead protections.
Bankruptcy Homestead Exemptions
Someone who files for bankruptcy in New Jersey has a right to use federal bankruptcy laws. This is a good idea, because New Jersey does not have any protection or exemptions for homestead properties, whereas federal law provides $25,150 in exemptions.
To see whether your home would be safe if you filed for bankruptcy, you would need to determine the equity you have in the home. Some properties are still at a break even point, or even upside down in value, which means you will not risk losing homestead property in a bankruptcy.
However, as the economy has improved, many people have seen significant increases in the equity of their property.
If the equity in property is over the $25,150 protected (exempted) amount, the property could be sold by a bankruptcy trustee in a Chapter 7 bankruptcy. You may need an appraiser to determine the value of your property before filing for bankruptcy to make sure that the value falls at or under this dollar limit. If the property is sold by the Court, the homeowner would still receive a check for the exempted amount after the bankruptcy sale.
Losing Homestead Protections
The problem for many is that the $25,150 exemption only applies to homestead property. So if you had property with, for example, $24,000 that was homesteaded, it would be safe from the bankruptcy court. However, if that property was being used as a rental, or just being held onto waiting for an increase in value, it loses its homestead status. Thus, the property could be taken and sold by the bankruptcy court.
If the property had more than the $25,150 in equity, and was not homestead property, it could be taken and sold and the owner would not get the $25,150 back as he or she would if the property was homesteaded.
People should consider the risks before transferring title to property into LLCs, businesses, trusts, or other vehicles. Even if title remains in the owner’s name, once someone moves out and starts using property for a purpose other than homestead, there is a risk of losing the property and all of the equity in that property, should Chapter 7 bankruptcy become necessary.
Get help and advice if you are considering transferring ownership or title to your property. Contact a real estate attorney at The Law Office of Agnes Rybar LLC to help you from the very start of the process of buying or selling a home.
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