Understanding Homestead Laws
Homestead laws have been created by states to protect personal homes against creditors. These laws vary widely between the states with some providing almost unlimited protection and others providing no protection or the protection of only a few thousand dollars. There are six states (Florida, Iowa, Kansas, Oklahoma, South Dakota, and Texas) that have a no dollar cap on the homestead exemption, which means that your primary home in these six states, regardless of value, cannot be taken by a judgment creditor and is thus protected from lawsuits by state law. In the other forty-four states with limited homestead protection, you may want to put your home into a separate legal entity to protect it against a lawsuit if the equity in your home exceeds the amount protected by homestead law. For example, if you have $200,000 equity in your home and your state’s homestead laws only protects $5,000, a creditor could take your home to satisfy a judgment. Homestead laws are only for your primary residence, so vacation or second homes are not protected by homestead laws. Also, homestead laws do not protect you against federal tax liens.
What Can Happen if Your Home is Not Protected?
If someone were to obtain a judgment against you, they can seek to satisfy the judgment by taking your home. The collection process begins by the creditor filing a summary of the judgment (Abstract of Judgment) with the county recorder in the county where you own the property. Just as you cannot sell your property without satisfying liens from a mortgage or deed of trust, you cannot sell or refinance your home until the judgment is paid or expires.
The creditor can also file a Writ of Execution with the county recorder for the right to sell your home to the highest bidder at a public sale. The money collected from the sale of the property is used to pay the judgment and any interest and collection expenses. If the property sells for more than the amount of the judgment, interest, and collection cost, the excess is given to you.
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