what does homestead do for homeowners? primary homes
1 Answer from Attorneys
There are two forms of homestead, automatic and declared. A recorded declaration of homestead gives you no rights you didn't have under the automatic homestead exemptions. It just makes a record of what property you declare is your principal residential property that qualifies for the exemption and creates a rebuttable presumption that the homestead is valid. It also has some technical protections of the equity in the event you want to sell the property after the judgment lien is recorded and buy another homestead property within six months, but that is pretty unusual. So unless you own more than one piece of real estate the declared homestead is mostly meaningless.
Whether declared or not, the way the homestead works is to affect the allocation of proceeds in the event of a forced sale of the property to satisfy a judgment, or in bankruptcy. It effectively inserts your own lien into the order of priority, behind voluntary liens but ahead of judgment liens and bankruptcy claims.
The amount of the homestead exemption varies by how old you are, whether or not you are disabled, and whether or not you are single or a "family unit." Initially $75k for singles, $150K for family units and low income singles, and $175k for disabled, it has been adjusted for cost of living as of April 2013 and will be adjusted every year.
Depending on the equity you have in the property, this may effectively block judgment creditors from foreclosing on their judgment lien, because there would be no money left for them. In order to force a judgment sale they must show that it will yield money for them. So if the voluntary liens (mortgage, HELOC, etc.) plus the exemption add up to more than the value of the property, they will have to wait for the value to rise before they can force a sale.
So an example of the way it works is: You are married and have a home worth $250k. You have a mortgage of $175k and a home equity line of credit of $25K. A judgment is entered against you for $20k. If the property was, say, a rental unit you owned, the judgement creditor would have plenty of equity to use to pay the debt. They would obtain a writ of execution and order for sale of the property. The banks would get paid off, the judgment would get paid off, and the $30k balance would go to you. If the property is your homestead, however, the judgment creditor would not be able to force a sale because your $150k exemption would come in ahead of their judgment lien. They could only force a sale once the value increases to at least $351k. Now suppose the property is worth $360k. In that case they could force the sale, but you would get your homestead exemption. So the bank would be paid, you would get $150k and the judgment creditor would only get $10k toward their judgment.
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