How Will My KY Home be Affected by Bankruptcy?

Can you keep your home if you file for bankruptcy in Kentucky?

Kentucky bankruptcy laws only allow $5,000 of equity in a primary residence to be protected through the bankruptcy process. In light of the fact that homes are still most people’s biggest asset, this exemption seems rather meager.

The good news for Kentucky homeowners is that they are permitted to choose between Kentucky state exemptions and the federal bankruptcy exemptions. Through Bankruptcy Code, section 522(d)(1) – Real property, including mobile homes and co-ops, or burial plots up to $20,200 are exempt in Kentucky thanks to the availability of federal exemptions. The unused portion of the federal homestead, up to $10,125, may be used to exempt other property.

How does the federal exemption work in the context of a chapter 7 bankruptcy case? Let’s say, for example, that Jeff owns a home in Louisville worth $200,000. The home is encumbered by a first mortgage of $190,000. Jeff has $10,000 of equity in his home. If he were to file for bankruptcy, his home equity would exceed the maximum amount exempt under Kentucky law by $5,000. Theoretically, Jeff’s home would be subject to forced sale by the bankruptcy trustee, although it is unlikely the trustee would attempt to sell the home to go after such a small amount of equity. A cash settlement in which Jeff made a small payment to the trustee in order to keep his home would be far more likely. However, even in the above example, Jeff will be capable of exempting all of his home equity if he elects to use federal bankruptcy exemptions. Under the federal exemptions, Jeff could allocate $10,000 to protect his home equity and still have $10,000 left over to protect additional property. No wonder Kentucky bankruptcy lawyer, Aaron Huff, “almost always” uses federal exemptions for his clients.

To summarize, Kentucky bankruptcy laws offer very modest protection for the homestead. As a result, most people filing for bankruptcy in Kentucky will use federal exemptions to protect their home through the bankruptcy process. Kentucky bankruptcy laws can be complex, if you have questions, consult an attorney.

Looking for more information? See also:

What is a homestead exemption? Can creditors take my home?