Bankruptcy Homestead Exemption in Virginia

When comparing bankruptcy exemptions here in Virginia versus those in Washington, DC, I cannot help but think of Charles Dickens’ opening line in his novel, A Tale of Two of Two Cities, “It was the best of times, it was the worst of times…,” as in, the best of times for Washington, DC and the worst of times for the Commonwealth of Virginia.

As a bankruptcy lawyer located in Alexandria, Virginia, one of the first questions that I will be asking you when we meet at my office is what state do you reside in (it is not uncommon for folks to live in Alexandria, VA but work in Washington, DC or vice versa). Why? Because it is always about location, location, location or more to the point, what state you live in. When filing for bankruptcy, the difference between residing in Alexandria, Virginia or just across the Potomac in Washington, DC can have a huge impact.

If you qualify for a chapter 7 bankruptcy based on your income, then the next immediate consideration is whether you have any assets. If you do, and you cannot exempt a particular asset, then the bankruptcy trustee has the right to seize and liquidate that asset. For virtually all bankruptcy filers, their home (as in the equity in their home) is their biggest asset. If you have equity in your home, then allow me to demonstrate the differences between filing in Washington DC versus filing in Virginia.

The legislatures in Washington, DC decided that if an individual has resided in their primary home in Washington, DC for more than 1,212 days (3.3 years), then the individual is allowed to exempt the entire equity in their home. For example, if you have $200,000 in equity in your home, then you may exempt the entire $200,000 in equity. Meaning, the bankruptcy trustee my not force the sale of your home and will not walk away with the proceeds as a result of you filing for chapter 7 bankruptcy. You get to wipe out all of your unsecured debt while fully protecting your home. If however, you have resided in your home in Washington, DC for more than 2 years but less than 3.3 years, then you are limited to approximately $140,000 in the amount of equity that you may exempt. Finally, if you have lived in your home in Washington, DC for less than 2 years, then unfortunately you will not be able to utilize the Washington, DC exemption laws; federal bankruptcy law requires that you reside in a state for at least 2 years before you can take advantage of the state’s exemption scheme.

Now, in case you are thinking that Washington, DC’s bankruptcy exemptions are the norm, I assure you, this is not the case. Washington, DC is among a handful of states that is extremely generous when it comes to home exemptions.

Unfortunately for Virginians, the state for lovers, the state’s bankruptcy exemption laws do not show a whole lot of love. In fact, you could say that Virginia’s bankruptcy exemption laws are darn right unfriendly to its residents. The stark difference between Virginia and Washington, DC is that Virginia does not have a primary residence exemption. All that Virginia has to offer individuals who reside in Virginia and who are filing for chapter 7 bankruptcy is the homestead exemption. Virginia’s homestead exemption allows you to exempt a whopping $5,000 in your home. If you are over the age of 65 or are disabled, Virginia generously increases that amount to $10,000. So, what happens if you have $200,000 in equity in your home in Virginia? You will have to file for a chapter 13 bankruptcy. Meaning, you will have to pay a large portion of your unsecured debt. There is one exception that could apply to married couples.

So there it is – when it comes to filing for bankruptcy in Washington, DC versus Virginia, it is most certainly a tale of 2 very different cities!

Will I keep my home if I file for Bankruptcy in Virginia?

When people typically ask this question what they are really asking is: Can I file a chapter 7 bankruptcy case and wipe out all of my credit card/medical debt? After all, chapter 7 is the bankruptcy that allows you to have your cake and eat it too as they say. As in, wipe out all your unsecured debt and keep your stuff.

So, what’s the answer? Well, it depends. Do you have a bunch of equity in your house? These days the answer is typically “no.” If your house is “upside-down” and you have no other major assets, then you have nothing else to worry about. No need to keep reading.

But, if that is not the case, and your home does in fact have a substantial amount of equity, then the next question to ask yourself, are you married or single? If you are single, then regretfully your only option may be a chapter 13 bankruptcy. To read more about the dilemma of single people filing for bankruptcy when your home has a lot of equity, please see my other blog article titled Will I lose my House if I File for Bankruptcy?

If you are married, then the next question that you need to know the answer to is whether you own the house together with your spouse? If the house is in fact jointly owned, then you want to examine the deed to your home. The language in the deed will make all the difference in the world. In Virginia, when a husband and wife buy a home together they can title the property in one of three ways: Joint Tenants with rights of survivorship, Tenants in Common, or Tenants by the Entirety with rights of survivorship. I won’t bother putting you to sleep with the legal distinctions between each title, but hopefully when you examine your deed you will note that it says Tenants by the Entirety. If so, then great. By the way, fortunately, when married couples purchase homes in Virginia at closing the deed is almost always titled in this fashion by default.

So that leaves you with one last question: Other than the mortgage which might have been taken out by both spouses, or possibly the car loan that could be in both names, is the unsecured debt (that would be your credit cards, medical debt, personal business guarantees, etc.) in both names or in your own individual name? Hopefully, it is the latter. As in, each spouse has his/her own debt separate and apart from the other. If so, then fantastic; the equity in the home is fully protected regardless of amount. Whether only one of the spouses decide to file for bankruptcy alone, or if they choose to file for bankruptcy together they can safely file a chapter 7 bankruptcy and not have to worry about losing their home to the chapter 7 trustee. The home is exempted and protected.

So what is the lesson here? Yes, I am going to repeat myself since it is worth repeating.  If a married couple is going to purchase a home in Virginia, be absolutely certain that the deed to the home is titled as Tenants by the Entireties and during the course of the marriage be absolutely sure to never, ever take out any joint loans or credit cards. And what about those couples who at the time getting married already own a property in their own individual name? I suggest you do what I did and that is give your new “honey” a great wedding gift by adding their name to the deed and ensuring that it is titled Tennants by the Entirety. After all, as they say, you hope for the best, but want to be prepared for the worst!