Equity Limits for a Chapter 7 Bankruptcy in New Jersey
- The State of New Jersey by law allows you to claim $136,875 in value in your primary residence as exempt from a bankruptcy proceeding. This means that if your house is worth less than that, it cannot be taken in a bankruptcy. The trustee will not take your home to sell, as any available equity would have to be returned to you after the sale and payoff of the mortgage.
- The bankruptcy court may limit your homestead exemption if you have owned your home less than three and one half years. This is to keep you from defrauding your creditors by moving to a state with a high homestead exemption or an unlimited exemption a short time before filing for bankruptcy, in order to shield assets from creditors. Once you have lived in a state for more than three and one half year, the state's full exemption amount applies. The court may decide to apply the exemption from your previous home state until that time.
- There is some debate about pre-bankruptcy planning as to how it applies to homestead exemptions. On one hand, it is acceptable to plan your bankruptcy by shifting assets from exempt to non-exempt assets. But there are limits to this planning. Generally, you may shift cash and other assets into home equity up to the exemption amount and have the equity be protected in the bankruptcy. Courts have looked favorably on this practice in the past, but each case can be looked at individually. Pre-bankruptcy planning is sometimes more of a gamble than an exact science.
- The federal government has its own bankruptcy exemption amounts for homesteads and other assets. The federal homestead exemption is $21,625. Most states have their own exemption amounts, but several states, like New Jersey, allow you to use either the federal or state exemption amount, whichever is better for you. Obviously, with a large amount of home equity the state exemption is advantageous, but if you do not have that equity, the federal exemptions may work better for you.
