The Bankruptcy Code Acknowledges the Validity of the Homestead Exemption

Many times the subject of bankruptcy seems baffling in its complexity. Actually the basic principals of bankruptcy are fairly simple even though the federal statuses on bankruptcy are extensive. The reason that the statutes are so complex is because in as effort at social engineering, the lawmakers want to cover every possible contingency. The very complexity of the Bankruptcy Code gives the lawyers ample opportunity to try to obtain interpretation of the law which best serves their clients interest. This results in extensive litigation and occasionally in interpretations of the Code which were not what legislature intended. This on turn results in additional legislation, which results in additional litigation and on and on. Nevertheless, the underlying principals are not as complex as the Code makes them seem. Here we will discuss the personal nature of bankruptcy.

The concept of bankruptcy is an old one in the English common law. If a person could not pay his debts, his creditors hauled him into court, took all of his assets, and used those assets to satisfy their debts. If the assets were insufficient to satisfy the debts, the debtor was taken from the bankruptcy court to debtors' prison. Since this is a rather extreme remedy, Article 1 Section 8 of the U.S. Constitution gives the Congress the right to establish "?.uniform Laws on the subject of Bankruptcies throughout the United States."

As the popularity of debtors' prison declined, the concept of giving the debtor a fresh start became one of the primary purposes of the bankruptcy process. It is important to remember that a bankruptcy is a personal action which at time of discharge gives the petitioner (formerly the debtor) a fresh start. The property owned by the petitioner does not get the fresh start, the individual does.

The fact that bankruptcy is a personal action may shed some light on the effect of a homestead exemption in a bankruptcy proceeding. The bankruptcy code acknowledges the validity of homestead exemption. A homestead exemption is a personal exemption which, in an effort to preserve a person's home, protects a certain amount of an individual's equity in the homestead property. State law determines the extent and effect of a homestead exemption. Thus, if state law says that a person can declare a homestead up to $45,000 and if there is less than $45,000 equity in the property, that equity in the property is protected by the homestead exemption. This principal operates without regard to the Federal Bankruptcy Code.

By John E. Roush, Broker-Owner Atrium Real Estate Investments. John is a full-time real estate agent specializing in real estate investment and real estate investment education. To contact John send all correspondence to Johnr@investorloft.com

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