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What Is a Homestead and What Does It Mean to Have Equity?
A homestead is simply the legal word that describes a family home and residence, as well as the land and surrounding facilities. While a homestead can be limited to just the family home, it can also be more expansive. For instance, when a homestead is a family farm, it may also include the land and the outbuildings.
Generally speaking, most people cannot buy their home in cash. As such, most people will agree to take out a loan which is secured by the property. This is the mortgage on the property. As the homeowner pays off the mortgage, (s)he builds equity. Equity is the ownership interest in the property that the homeowner currently has. This can be calculated by finding the difference between the value of the home and the amount still owed on the mortgage.
Consider a hypothetical home that was appraised for $150,000. The balance on the homeowner’s current mortgage is $50,000. The homeowner’s equity is the difference between the $150,000 appraisal and the remaining mortgage of $50,000. In this scenario, the homeowner would have $100,000 in equity.
Can I Protect My California Home from Foreclosure or Liquidation if I Don’t Make a Homestead Declaration Before Bankruptcy?
It is important to note that one is not required to make a homestead declaration in California before one can utilize the homestead exemptions and protections in the U.S. Bankruptcy Code. This means that a bankruptcy filer in California can elect to utilize the $75,000 in home equity protection provided by California’s bankruptcy exemptions. Furthermore, certain individuals are permitted to protect even greater amounts of equity. For instance, a head of a household may protect up to $100,000 in equity. Senior citizens, individuals with certain disabilities, and others may protect up to $175,000 in homestead equity. To be clear, these exemptions and protections are all available regardless of whether the individual declares a homestead.
Should I Still File a California Homestead Declaration?
Homeowners with certain concerns or who are facing certain debt situations may be able to obtain additional protections by declaring their homestead. A declared homestead is required to be the principal and actual dwelling of the declared homestead owner. However, following the initial declaration, there is no ongoing requirement for the homeowner to continue living in the residence.
Recording the homestead declaration will permit a homeowner to maintain priority over any and all subsequent judgment creditors. In taking this action, a homeowner will be entitled to an exemption even when the sale of the home is voluntary. Thus, an individual with debts who still wishes to sell the family home may use this procedure to avoid a situation where all proceeds from the sale are captured by creditors. Since the proceeds must be reinvested into the purchase of a home within 6 months, this is often a viable option for Californians who are looking to downsize or relocate their living arrangements while coping with serious debt problems. However, it is important to consult with a bankruptcy lawyer regarding homestead exemptions and declarations because timing and attention to detail can frequently make the difference between a successful transaction and a serious, potentially irreversible error.
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