The American Dream is to own your home. A home is where the heart is and most likely that person’s most cherished possession. The prospect of losing a home to judgment creditors or a bank holding a mortgage can be a homeowner’s worst nightmare.
The good news is, in contrast with the $10,000 homestead exemption that existed 24 years ago, the New York State legislature has over time dramatically increased the “homestead exemption” available to homeowners that reside in their property.
A homestead exemption is the amount of money protected from the reach of judgment creditors over and above consensual liens (such as mortgages and home equity loans) and statutory liens (generally tax liens) in an involuntary sale. Prior to 1994 the New York homestead exemption was only $10,000. That was hardly enough money to purchase a new home or even pay rent for more than a few months. In 1994 the homestead exemption was increased to $50,000. Thereafter, the homestead exemption for persons living in NYC and the surrounding Metropolitan counties, was dramatically increased to $150,000 with adjustments to be made to that amount every three years. The last adjustment was made in 2018. As of September 2018 the homestead exemption for Metropolitan New York counties is $170,825. (Upstate counties have lower amounts).
A homeowner that actually resides in the home is entitled to the homestead exemption. A husband and wife are each entitled to claim their own exemption. By example illustration, a husband and wife who own a home worth $340,000 with no mortgage debt or statutory liens but who have judgment(s) against them for $300,000 could protect against a judgment creditor’s efforts to have the Sheriff conduct a judgment lien creditor sale of their residence because, after accounting for the combined $341,650 homestead exemption, there would be insufficient funds available after the sale to pay the homestead exemptions.
Although the residence under the above facts could not be sold by a judgment creditor to satisfy their judgment, the judgment lien would nonetheless continue to survive and have to be paid in the event that the homeowners sought to voluntarily sell the house or refinance. This is because the homestead exemption generally only comes into play when there is an involuntary sale of the property by a judgment creditor. There is no homestead when the homeowner voluntarily sells the property or when the property is involuntarily sold pursuant to a mortgage foreclosure action or tax lien sale. So, homeowners will generally be unable to sell or refinance their home with judgment lien(s) filed against it unless the judgments are satisfied by payment in full with statutory interest (9%) or a negotiated lower settlement amount.
There is however a scenario by which a judgment that impairs a homestead exemption can be removed as a lien against a residence. That is by filing a bankruptcy petition. The filing of a bankruptcy petition permits the homeowner to remove judgments that impair the homestead exemption without the house actually being involuntarily sold. To the extent that the homeowner is eligible to file for bankruptcy and it otherwise makes sense to file for bankruptcy relief, judgment(s) that impair the homestead exemption can be removed by making an appropriate motion in the bankruptcy court while the bankruptcy case is open. The result is removal of all or that portion of the judgment lien(s) that impair the homestead exemption while retaining the homeowner’s ability to remain in the home. A bankruptcy trustee will generally not be able to sell the residence unless there is sufficient equity in the house to satisfy the homestead exemption first. It is rare these days for a trustee to be able to sell the homeowners residence because the available equity after payment of mortgage(s) is often under the homestead exemption cap reserved for the homeowner. The motion will have to be supported by (i) a valuation of the house; (ii) a lien search showing the liens on the property; and (iii) a computation of the value minus lien amounts to determine the remaining equity in the property.
Removal of judgment liens can enhance the fresh start envisioned by the bankruptcy code and permit a judgment creditor to eliminate judgment liens that are not otherwise removable outside of bankruptcy. Judgment lien removal through bankruptcy can provide the homeowner with (i) the ability to remain in their home as long as they pay their mortgage; and (ii) the comfort of knowing that they will benefit from increased equity in their home due to appreciation of the property over time, improvements they might make and reduction of principal due on the mortgage as regular monthly payments are made.
This area of the law can become very complicated quickly particularly where (i) there are multiple liens; (ii) there is more than one owner of the property; (iii) owners are married; (iv) only one married joint owner files etc. A seasoned bankruptcy practitioner should be consulted. This is not a situation where one size fits all.