When a homeowner is facing financial difficulty and contemplating filing for bankruptcy, they may question whether they will have to give up their home as part of the process. In bankruptcy law, exemptions allow debtors to retain certain assets, protecting them from being part of the bankruptcy estate and potentially sold off to pay creditors. The homestead exemption is one such legal protection. It safeguards a debtor’s interest in the equity in their primary residence, up to certain limits. In New York, debtors have access to two sets of exemptions when filing for bankruptcy: New York State exemptions and Federal exemptions. A debtor may only use one set of exemptions, and the choice between these two will usually depends upon the amount of equity they have in the property.

The Bankruptcy Homestead Exemption in New York 

NYCPLR §§ 5206(a) creates New York’s homestead exemption. The exemption is not a fixed amount across the entire state. Instead, it depends on the county where the debtor resides. The state has divided its exemption limits as follows:

• $204,825 for residents of Kings, Queens, New York, Bronx, Richmond, Nassau, Suffolk, Rockland, Westchester, or Putnam counties.
• $170,700 for those living in Dutchess, Albany, Columbia, Orange, Saratoga, or Ulster counties.
• $102,400 for residents of all other counties in New York.

(Please note these amounts are doubled for married joint debtors who are both on the deed to the property.)

The figures above correspond to the debtor’s interest in the equity in their primary residence, or the value of the property minus any mortgages or liens and then taking into account the debtor’s interest percentage. Additional parties on the deed, such as a relative or friend who helped the debtor qualify for the mortgage, will reduce the debtor’s share of the equity in the property. Please note, the debtor cannot just add parties to the deed to reduce their equity in order to protect their property in bankruptcy. Unless the parties actually purchase their share of the property from the debtor for fair market value, the transaction would be considered a preference that could be reversed by the Trustee if the transaction took place within 4 years of the bankruptcy filing.

The Federal Homestead Exemption

Under the federal bankruptcy laws, the homestead exemption is limited to $27,900 (as of 2023) under 11 U.S.C. § 522(d)(1). This amount is much lower than the exemption amounts allowed under the New York State exemptions. Debtors with little to no equity have the option to use Federal exemptions and thereby gain access to other exemptions that are more generous than those in New York State law.

The Concept of Equity

When determining whether a debtor’s interest in their property is protected by a homestead exemption, equity refers to the difference between the market value of the property minus the amounts owed on any secured liens attached thereto, such as mortgages, second mortgages, or home equity loans. For example, if a home is worth $300,000 and the homeowner owes $250,000 on a mortgage, the equity in the home is $50,000.

Other factors that can affect the calculation of equity include:

• Second mortgages and home equity loans: These are included when determining the equity in the property. If in the example above, the debtor also owes a $30,000 second mortgage, then the property has only $20,000 in equity.
• Co-owners of the property: If there are other individuals listed on the deed, their share of the equity will be considered when calculating the debtor’s equity in the home. In the example above, if the debtor jointly owns the property with a spouse, their share of the equity is $25,000, and if the debtor owns the property with their spouse and an additional third party, their share of the equity is only $16,666.
• Recent transfers: If there have been any changes in the property deed within the last four years, this may also impact the bankruptcy case since such transfers of equity may be reversible by a Chapter 7 bankruptcy trustee.

If the debtor is close to the limit of the exemption, it is essential to get a professional appraisal to determine the actual market value of a home when calculating equity for bankruptcy purposes. Online services such as Zillow or Redfin can provide rough estimates, but they may not be accurate enough for a bankruptcy case, especially when there is significant equity.

If the debtor’s equity falls within the applicable exemption limits, they can retain the home in a Chapter 7 bankruptcy case. If the equity exceeds the exemption limit, the Chapter 7 bankruptcy trustee would have the right to sell the home to pay off creditors. The equity in a Chapter 13 bankruptcy case will be protected, as long as the creditors receive at least as much as they would in a chapter 7 proceeding.

Primary Residence Requirement

One of the key aspects of the homestead exemption is that it only applies to the primary residence of the debtor. This means that only the home in which the debtor has their domicile qualifies for protection. Secondary properties, such as vacation homes, rental properties, or investment properties, are not eligible for the homestead exemption.

The Impact of Claiming the Homestead Exemption

When filing for bankruptcy in New York, most homeowners tend to use the New York exemptions to protect the equity in their home since it is much more generous than the Federal exemption. This means that they forfeit other protections that they could claim under the Federal exemptions. They have no access to the Federal wildcard exemption of $1,475 plus $13,950 of any unused portion of the homestead exemption, which can be used to protect any asset. This includes money in the bank or other accounts, tax refunds, equity in a car that exceeds the vehicle exemption, or any other asset that needs protection. Additionally, the debtor is only able to protect $10,250 of their interest in a personal injury claim, where the Federal exemption protects $27,900 plus any unused portion of wildcard exemption.

The Impact of Exceeding the Homestead Exemption

Over recent years, home values have increased substantially in many parts of the country, especially in New York. As a result, some debtors may find that the equity in their home exceeds the exemption limit. In these Chapter 7 bankruptcy cases, the bankruptcy trustee may look to sell the home in order to repay creditors. However, exceeding the exemption limit does not necessarily mean that a debtor will lose their home. There are a few potential strategies that could allow a debtor to retain their property, even if the equity exceeds the homestead exemption:

1. Chapter 13 Bankruptcy: If a debtor’s equity exceeds the exemption, they may still be able to retain their home by filing for Chapter 13 bankruptcy, which involves restructuring debts and repaying via a Court-approved plan that typically lasts 60 months.
2. Buyout of Equity in Chapter 7 Bankruptcy: Another possibility is for the debtor to “buy out” the equity from the bankruptcy estate. In this scenario, the debtor pays the trustee the amount exceeding the exemption limit which can sometimes be negotiated. These funds would then be used to pay the claims of creditors in the Chapter 7 case.

Contact The Law Offices of David I. Pankin, P.C.

Homeowners who are struggling financially should consult with a bankruptcy attorney to explore their options and ensure that they are making informed decisions that protect their assets during the bankruptcy process. At the Law Offices of David I. Pankin, P.C., we have almost 30 years of experience helping homeowners file for bankruptcy. Call our offices today to arrange a free consultation at (888) 529-9600 or by using our easy online contact form.