Homestead Act in Bankruptcy

Washington Homestead Act

New Developments in Bankruptcy Law and The Homestead Act (state exemption law) which has recently come out of the Ninth Circuit involving a Washington State resident with real property in Washington State.

Transcript of Homestead Act v-blog

(pardon the grammar and possible transcription errors)

This is Mark Nusz at Westward Law. I’m here to discuss what happens when you own a house and you have acquired a significant amount of equity and need to file for bankruptcy. If you need to file, then bankruptcy is still a tool for you to consider and I am here to discuss what happens with the equity in your house. Here at Westward Law we can protect your equity but there are some limitations that you should be aware of. Filing bankruptcy in Washington when you own a house will likely require the use of the Washington Homestead Act.

You can have a certain amount of equity in your house that you can protect in a bankruptcy. In chapter 7 you can protect that equity just as much as you can in a thirteen. In a Ch 7, you need to be up-to-date on your house payments to protect it, but here is how the state law helps you in Washington with a chapter 7. In Washington state if you qualify, and you’ve been a resident in Washington for a long enough period then you can claim the Washington exemptions for bankruptcy (The Homestead Act). Under Washington state law you can generally exempt up to $125,000.00, which is very beneficial. You want to be able to protect your equity since that will be a nest egg, and / or, something that you could possibly borrow from after the bankruptcy is over. These funds will allow you to have a fresh start with something to fall back on.

Under federal law the federal exemptions (which is another body of law that many people use) are a possibility too. In Washington state we have a choice to use the federal

Call Westward Law to speak with a Bankruptcy Attorney about the Washington Homestead Act
View from the 19th Floor of the U.S. District Court for the Western District of Washington

exemptions or the Washington state exemptions. You might want to use the federal exemptions if you haven’t lived here long enough for Washington state exemption law to come into play and your exemption is not as large. There are some aspects of the federal exemptions that help individuals filing for bankruptcy.

That being said, if you have a lot of equity in your house that exceeds the federal exemptions, then you will want to aim for using the Washington exemptions which cover you up to a much greater amount of equity.

In Re: Rigby v. Wilson (2018)

Yesterday I was down at the at the Bankruptcy Court in Seattle where we were getting updates on some new cases that have come through the courts here in Washington, and then up through the Ninth Circuit. One of them has to do with Washington exemptions for your house (The Washington Homestead Act) and how much can you protect under Washington law. This is a very interesting case to watch for case law that is currently being worked out. It depends on which side you’re on, but it wasn’t the best news for people that are trying to protect equity in bankruptcy. One of the big issues that is coming up lately when you file for bankruptcy is the appreciated equity in your house. On the day you file for bankruptcy is when the line is drawn and whatever the value of your house is on that day is what gets recorded. If that equity changes and exceeds the maximum possible exemption than there is an issue.

Hot Real Estate Market in Seattle / Western Washington

The real estate environment in the Seattle area for the last several years resulted in situations where people would file for bankruptcy and then after the day they filed their house would continue to appreciate at a rapid pace. For example, on day one or day zero the house had 120,000 of equity. This is fine since the homestead exemption can protect that but then what happens 3 to 4 months down the line while the bankruptcy is still ongoing? If the market is just going straight up and the accumulated appreciation in the property, it pushes the equity over $125,000.00 in the course of the time that the bankruptcy is still open; now a good issue is suddenly a bad one. Now the home owner is exposed because your house has extra equity sitting there that a trustee might see is something that they ought to go after. If they can obtain a large amount from the additional equity in your house, then they might consider selling the property to go after that equity so they can put those funds towards the creditors you owe.

On day one the house was fully protected but then three or four months later the trustee may be allowed to go after the additional equity. The debtor’s original exemption is always protected and if the house is sold for additional equity, they will get their original exempted amount. The additional funds acquired through growing equity were what was being discussing yesterday. I think it still remains to be seen how this case law will eventually play out, but for all intents and purposes any kind of appreciation in the house after you file for bankruptcy belongs to the estate which means that the trustee can then start thinking about what they want to do with it. That is the outcome of these cases so far. I found the possibilities in t these cases fascinating and something that I will be keeping a close eye on.

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Call Westward LAW PLLC – work with Attorney Mark D. Nusz on the issues with debt, insolvency, and creditor matters that may be leading you toward bankruptcy. It is almost always best to consult with a bankruptcy attorney well in advance of any bankruptcy filing.