From time to time, a client will call our law office asking about homestead protection, and whether they and their home are eligible. What is homestead protection, and why might it matter to you? The short answer is that homestead protection could put the equity in your home out of the reach of creditors.
First, it’s helpful to get some definitions straight. A “homestead,” legally speaking, refers to one’s primary residence. You might have a house and cottage in Michigan and perhaps a condo in another state where you spend the cold weather months. It is possible to have multiple residences, but only one primary residence, or homestead.
A homestead exemption is a provision in the law that offers some creditor protection after the spouse of a homeowner dies, or when a homeowner files for bankruptcy. This homestead protection is established by state law and varies significantly from state to state. Only a couple of states (New Jersey and Pennsylvania) offer no homestead protection; others, like Florida and Texas, offer almost total protection for a homestead against unsecured creditors. Most states, like Michigan, fall somewhere in between these two extremes.
Creditors and the Michigan Homestead Exemption
Homestead protection applies to the equity in a home and is designed to help prevent a forced sale of the home. The equity is the value of the property, minus the amount of the mortgage or other claims (like tax liens) against the value of the home.
Homestead protection applies to the equity in a home and is designed to help prevent a forced sale of the home. The equity is the value of the property, minus the amount of the mortgage or other claims (like tax liens) against the value of the home. For instance, if your home was worth $300,000, and you had a mortgage balance of $200,000, the equity in your home would be $100,000.
The Michigan homestead exemption amount is adjusted annually. The homestead exemption for 2021 is $40,475, or $60,725 if the person claiming the exemption is over 65 years old or disabled. That is the amount of equity in a home protected by the homestead exemption.
The homestead exemption applies to a house that serves as a principal residence, but can also apply to a mobile home, condominium, co-op unit, houseboat, or even a motor home. If the principal residence is within the bounds of a city, village, or recorded plat, the exemption applies to the lot or parcel on which the home is located. A homestead exemption may include up to 40 acres if the principal residence is located outside of a city, village, or recorded plat. If the equity in a home exceeds the amount of the exemption, only the exemption amount can be protected.
If a creditor seeks to force the sale of a principal residence, such as in a bankruptcy, the homestead exemption may prevent the sale. If the amount of equity in the home is less than the exemption amount, the homeowner cannot be forced to sell. If the equity in the principal residence was more than the exemption amount, a creditor could force the sale of the property. The homeowner would be entitled to the proceeds of the sale up to the exemption amount, with the creditor taking the rest of the value of the equity.
Note that this analysis only applies to unsecured creditors, such as credit card companies and medical providers to whom a homeowner might owe a debt. The mortgage lender is a secured creditor; the debt is secured by the property itself. If a homeowner defaults on mortgage payments, the homestead exemption will not prevent the lender from instituting a foreclosure action.
In some states, it is necessary to file a homestead declaration with the county recorder’s office to claim a particular property as one’s homestead. In Michigan, there is no such requirement. In a bankruptcy, the Michigan homestead exemption is automatically available to the homeowner.
Is the Homestead Exemption the Same as the Michigan Homestead Allowance?
They sound similar, but the Michigan homestead exemption and the Michigan homestead allowance are not the same thing. In Michigan, the surviving spouse of a deceased person (decedent) is entitled to claim a homestead allowance of an amount adjusted annually for inflation. In 2021, the homestead allowance amount is $24,000. If there is no surviving spouse, the allowance will be divided among the decedent’s surviving minor and dependent adult children.
The homestead allowance has priority over most other claims against a probate estate, with the exception of the costs of administering the estate and the decedent’s reasonable funeral and burial expenses. Priority means that if there are not enough assets in the estate to pay all claims, a claim with priority (such as the homestead allowance) will be paid before other claims.
The homestead allowance is paid to a surviving spouse or minor/dependent children in addition to any share of the estate to which they were entitled under the decedent’s will or Michigan law.