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Increased Homestead Exemption in Virginia
Virginia bankruptcies dramatically changed for homeowners starting July 1, 2020; Chapter filers 7 finally have a real Virginia homestead exemption to protect some equity in their homes. Prior to July 2020, most individuals with equity in their home had to file a Chapter 13 to protect any equity in their home. The first thing most homeowners say when they sit down with bankruptcy attorneys is usually: “Can I keep my house?” or “I want to keep my house out of bankruptcy.” Here in Virginia, the answer often was that your house could be a complication or that you cannot keep your house out of the bankruptcy.
Why Exemptions Matter
Let us back up and explain. When you file a Chapter 7, you are filing a liquidation bankruptcy. You must list all assets and all debts. You can keep a lot of things in a Chapter 7, but there are limits. Specific laws control what you can keep; these laws are called exemptions. The exemptions you can use depend on state law and where you have resided for the past two years. Some debtors use federal exemptions, which are controlled by Congress. This often occur for various reason. One situation is that the state permit debtors to elect federal exemptions. A debtor may also use federal exemptions is when a debtor has not resided in the same state for two years.
Assets without protections are called non-exempt assets. The trustee in your case looks at non-exempt assets to determine if there is value to sell and give to creditors. To avoid selling the property, Debtors could file a Chapter 13 and restructure their debt.
Many individuals believe that if an individual files bankruptcy, but the property is owned joint with another person, the court cannot sell it. Unfortunately, this is not true. The bankruptcy court can force the sale of a jointly owned property; however, the joint owner would still receive their percentage of the proceeds at the sale. There is a limited protection for some property purchased and owned by a married couple with no joint debts, but the analysis depends on various factors.
Virginia Homestead Exemption
Prior to July 1, 2020, Virginia only had a $5,000.00 wildcard to cover any equity in a home. This wildcard would also have to protect some of the money in your bank account and any cash like assets you had that did not fall into any other category. As a result, most Virginia residences with equity could not file a Chapter 7 without risking their home, unless limited exceptions, like Tenancy by the Entirety existed. But, now, Virginia allows $25,000.00 in exemption for your primary residence or the residence of your dependents. Virginia Homestead Exemption can be combined with the current $5,000.00 wildcard to possibly allow up to $30,000.00 in protection for equity in homes.
How the Virginia Homestead Exemption Works
The current Virginia homestead exemption is the same across the state. Individual state legislatures control state exemptions; for example, the Virginia General Assembly enact all Virginia exemptions. This means that if you have a $100,000.00 home in Lexington, Virginia you get to use the same $25,000.00 exemption as someone living in Arlington, Virginia with a $950,000.00 home.
The exemption, however, is only necessary for equity in the home. The equity is the profit you would see after you sell your home and pay ordinary expenses and any required liens. So, if you sold your $500,000.00 home, you would likely get approximately $460,000.00 after cost of sale (including realtors, taxes, closing costs, etc.). If you had a mortgage on the property of $400,000.00, then the proceeds/equity would only be $60,000.00.00. You could then use your Virginia homestead exemption to protect $25,000.00 of that equity.
Additions to the Virginia Homestead
If the Virginia homestead exemption is not enough to protect the equity in your home in a Chapter 7, you may have a few more protections. Debtors may use their $5,000.00 wildcard on their home, as long as it is not needed to protect a different asset.
If spouses own a property jointly, both spouses can claim their own exemption. This can help substantially for larger homes. Virginia’s $5,000.00 wild card doubles to $10,000.00 for those individuals who as 65 years of age or older. Thus, a homeowner who is 65 years of age may protect up to $35,000.00 in equity in their home.
Disabled Veterans in Virginia (those with service-connected disability of 40% or more, as rated by the U.S. Department of Veterans Affairs) also get an additional $10,000.00 for their wildcard. Veterans can stack this exemption with the regular wildcard that all Virginians receive.
In addition to Virginia’s wildcard, every Debtor gets an additional $500.00 for every dependent. As a result, if you have two dependent children, you will get an additional $1,000.00 to be used as a wildcard to protect your assets, including your home.
Homestead Exemptions in Other States
This is a significant increase for individuals in Virginia; however, it is still less than many other states. For example, the Florida homestead exemption allows individuals to protect their primary residence of unlimited value, as long as the debtor meets various requirements about size and length of time living in the state. In Washington, DC, the law allows a homeowner to protect up to $155,765.00 in equity, if the home was purchased within the 1,215 days before filing bankruptcy; after the approximately three years and four month period, the exemption is unlimited on their primary residence.
Homes and Bankruptcy
You need an experienced Virginia bankruptcy attorney to help you through a bankruptcy. Not handling the case properly can result in a Debtor losing their home or other assets. Many people believe that bankruptcy only requires filling out forms; but it is much more. An attorney will analyze situation, understand how laws apply to that situation, and help determine factors that could complicate a case.
It is also important to understand how the court may value your property; many people consider their property assessment to be the appropriate price on their home. However, this price is often wrong. In northern Virginia, home prices can be five to ten percent higher than their county assessed price. This difference can be the difference in you keeping your home and the court selling it.
Attorney Ashley F. Morgan is a Virginia licensed attorney. She has been helping clients deal with debts for most of her career. It is important for her that her clients are making the best decision for their circumstances.