One of the most common questions from anyone considering bankruptcy is whether they will be able to keep their home that they’ve worked hard to buy and maintain. It’s an important consideration, and in many cases, some or all of the equity that has been built up in the homestead can be protected from creditors.
What is the Homestead Exemption in Arkansas?
Arkansas law allows debtors to choose between state exemptions and federal exemptions depending on which will be more advantageous. Debtors who are married or heads of households are eligible for the Arkansas state homestead exemption, which can protect either an urban homestead on a quarter-acre lot or a rural homestead on up to eighty acres without limitation as to value. The only requirement is that the debtor not have acquired the interest in the homestead in the 1,215 days before filing bankruptcy (about 3 years and 4 months before). If the interest was acquired during this 1,215 day period, the value is capped at $170,350.00.
Debtors with substantially less equity in their homes, or who do not qualify for the Arkansas state homestead exemption due to never having been married or having been a head of household in the home, generally are better off with the federal exemptions of $25,150.00 per spouse.
How the Homestead Exemption Works Under Chapter 7
In Chapter 7, the bankruptcy trustee must sell any non-exempt property, including a home that has non-exempt equity in it. If this is the case, the trustee will pay the mortgage holder for the remaining debt, pay the debtors for the value of their exempt equity, and then distribute any remaining funds amongst the unsecured creditors.
If it is not possible to exempt all of the debtor’s equity in the homestead and other property, it is usually not advised to file a Chapter 7 bankruptcy, as the debtor will lose that equity and possibly other non-exempt property.
How the Homestead Exemption Works Under Chapter 13
If the debtor has substantial non-exempt equity in the home or in other personal property, the better course of action is to file a Chapter 13 bankruptcy. This allows the debtor to propose to pay to the Chapter 13 trustee over a 3 to 5 year period the value of the property that the Chapter 7 trustee would have sold, in addition to making payments on other debts such as mortgage payments and car note payments. If the payments are not affordable, the trustee will likely object, and the debtor might need to consider selling the property and paying that equity into the plan himself, and avoiding the extra expenses and fees that a Chapter 7 trustee would incur.
If you have equity in your home and are concerned about how to protect it from creditors, it’s important to consult a knowledgeable attorney who understands how to use Arkansas and federal law to best benefit your specific situation. Call the team at Natural State Law today at (501) 916-2878 to learn more and schedule a free consultation.