Increased Virginia Homestead Exemption
Virginia bankruptcies (and home equity protection from creditors in general) dramatically changed for Virginia homeowners starting July 1, 2020. A true Virginia homestead exemption was established to allow homeowners to protect some equity in their homes during a Chapter 7 bankruptcy or from creditor action in general. Prior to July 2020, many individuals with equity in their home had to file a Chapter 13 to protect any equity in their home. The current Virginia Homestead Exemption is $25,000.00.
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 in your bankruptcy case, we need to discuss your house in-depth, or you cannot keep your house out of the bankruptcy. The current Virginia Homestead Exemption helps homeowners to either protect up to $25,000.00 of equity in their home during in a Chapter 7 or reduce the equity factor in a Chapter 13 payment by that same amount. This Virginia Homestead Exemption has made a difference for many Virginia Homeowners, but it is still woefully lower than most of the country.
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. Additionally, many individuals in Virginia believe that the court cannot sell their primary residence. Unfortunately, these beliefs are incorrect. 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. The bankruptcy court can also authorize the sale of a primary residence if there is sufficient equity to pay creditors over the homestead exemption. The Virginia homestead exemption is currently $25,000.00. 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 the equity in your primary residence or the residence of your dependents; this Virginia homestead exemption is a right granted under the Virginia law and applies to all homeowners, unless the exemption was used on a another property in the prior 8 years. The 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 Exemption
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.
Tenants by the Entirety as an Alternative to Homestead Exemption
In Virginia, especially northern Virginia, many married couples are able to protect over $30,000.00 (or even $60,000.00) of equity in a house by using the Tenants by the Entirety exemption. This protection is not a homestead protection, since it can also be used on other assets. But, it is protection in Virginia bankruptcies that allows married couples to protect certain assets. Tenancy by Entirety (TBE) is a way for married couples to hold an interest in a property with survivorship rights. In order for this protection to apply, various elements must be met, including that the to couple must married at the time of taking ownership of the property. Basically it is as if the marital relationship owns the property, not the individuals. Additionally, for the protection to apply, the couple must have no joint unsecured debts, such as credit cards or personal loans. Any joint debts are able break the protection. In addition to joint, unsecured debts, any tax debts (including individual/non-joint tax debts) will break the protection.
While various or property can be held as TBE, for a house to be protected using this protection, the deed has to reflect the joint ownership, reflect the married couple’s status, and provide for survivorship; ideally, the deed will use the TBE language to be clear. Cars in Virginia specifically cannot be held under a TBE protection. The biggest benefit to this exemption is that since it is not a homestead exemption, there is no limit to the amount of equity that can be protected during a Virginia bankruptcy case.
This is a very specific and complicated protection. If you believe you qualify for this protection, it is crucial that you speak to an experienced attorney about the situation. Often a lot of review of the situation, including credit reports, title history, and debts must be conducted before determine if this protection qualifies. Debtors also need to be living in Virginia for a minimum amount of time to qualify to use this protection in a bankruptcy case.
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.
Additionally, any transfers of the property, including transfers between spouses and family members, can cause issues with homestead exemptions. There is always at least a 2 year lookback on transfers and possibly even longer, depending on the circumstances.
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.