Asset Protection

EQUITY THAT HOMESTEAD PROTECTS

Homestead laws seldom provide complete or even adequate creditor protection. The homestead laws, in all states but Texas and Florida, cover only a limited equity. Most states typically protect an amount between $10,000 and $40,000. Example: If your state homestead protects $40,000 in equity, and your home is worth $200,000 with a $100,000 mortgage, then your equity is $100,000. Forty thousand dollars would be homestead protected and $60,000 would remain creditor exposed. If your state offered a $100,000 homestead protection, your entire equity would then be protected.

Several states limit homestead to residences below a specified acreage. Texas protects residences under 200 rural acres, regardless of value. Additional land is unprotected, as is urban property over one acre. In Florida, your residence is generally protected up to 160 acres if outside a municipality and up to one-half of an acre if within a municipality.

Texas and Florida are the most protective states and shelter an unlimited equity. File bankruptcy in Texas or Florida and you can keep your home regardless of its value. Debtor relocations to Texas or Florida have historically been controversial asset protection strategies as assets reinvested in homes in these states thus become fully protected. This remains true in Texas, but not always in Florida.

Since other states are less liberal than Texas and Florida, you must know how much equity is protected under your state homestead laws. If your state has a very limited homestead exemption, leaving substantial equity exposed, then you must protect your home through additional steps.

This nine-point test can help you decide whether your state's homestead law adequately protects your home:

1. Does your state offer homestead protection?

2. Does your residence qualify for homestead?

3. Can you establish this property as your primary residence entitled to homestead protection?

4. Have you properly applied for homestead protection?

5. Where possible, is the homestead protection directed to the greater-risk spouse?

6. Do mortgages against your residence, plus the homestead exemption, equal or exceed the value of your home, or is substantial equity still exposed?

7. Were your debts incurred before or after you claimed homestead and are these debts covered under homestead?

8. Will homestead protect a future equity build-up?

9. Will homestead allow you to sell or refinance your home against a judgment creditor, or will the recorded judgment cloud your title and prevent a sale or refinancing?