People sometimes ask me whether the homestead exemption would protect their home if they owed people money. They want to know if there are situations where someone could take their home. In this post, I wanted to talk about homestead exemptions and how they work, and how they may vary from state to state.
While some states have laws that may require people to sell their homes in order to pay their debts, Texas has always considered homesteads to be sacred – more important than other debts. From the very beginning of what we now know as Texas, Texas law has protected family homesteads from judgment creditors. If you want to hear more about the history of the Texas homestead exemption, check out my other video that I made about that.
Most states have some form of homestead protection, but usually they are very limited compared to Texas. Texas, and a few other states like Florida, have very generous homestead exemptions.
Conversely, California for example, has a homestead exemption, but it’s limited to only $75,000 in equity for an individual, and $100,000 for a married couple. This means that if you’re single and have more than $75,000 of equity in your home, then anything over that first $75,000 could be fair game for creditors to seize. The creditor may be able to force a sale of your home. You might get the first $75,000, but the creditors may get the rest until your debts are paid. Anything left over may come back to you, but in a forced sale, what do you think the chances are of having money left over?
In Louisiana, the homestead exemption is even worse. Louisiana law only allows an exemption for the first $35,000 of equity in the home. Anything over that is vulnerable to taking by the creditors.
In Texas, the homestead exemption law is unlimited. So, even if your house was extremely valuable, and you owned it free and clear, your house may be shielded from judgment creditors. They may not be able to force a sale of the home, and they may have to look elsewhere to collect on their debt.
Now this is not to say that the Federal Government doesn’t have the power to sell your house. I have seen that happen. If a person refuses to pay his taxes, for example, the IRS may exercise its authority under Federal Law and supersede the State law. That being said, the IRS may choose not to take such drastic measures. They may choose to just file their lien and wait for you to sell the house, and then hold out their hand to get paid from the sale proceeds.
Also, this is not to say that your bank or mortgage company can’t foreclose on your home. The Texas Constitution may protect your home against judgment creditors. A mortgage company or bank, however, may not be a judgment creditor, but rather a contractual lien holder. In the case of a mortgage, the homeowner likely signed a contract giving the lender the right to foreclose (repossess) the home and sell it if the homeowner doesn’t pay the debt.
This is different than the situation with a judgement creditor. In the case of a judgement creditor, a credit card company may have a claim against you, but you may never have signed a contract giving them rights to your home. With the homestead exemption in place, the creditor may be able to sue you and get a judgment against you, but without a contract listing your home as collateral for the debt, the credit card company may have no claim against your home.