The Homestead Exemption in Action
February 22, 2010 by Oliveros & O'Brien, P.C.
Last week’s blog introduced the Oregon "homestead exemption." We explained how to qualify for it, and the kinds of homeownership it applies to. This week we tell you how this important tool actually works, and how it protects your home from some creditors but not others. Then In the next couple weeks we will show how bankruptcy can effectively handle the creditors that could otherwise defeat the homestead exemption.
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The Homestead Exemption Limits
In Oregon your homestead exemption protects your homestead from most creditors, but only to a limited amount, either $40,000 for a single person or $50,000 for a married couple.
Here’s how it works. If you owe a creditor on a debt—say a hospital bill or a credit card—that you can’t pay, that creditor can sue you. If you don’t have any defense to owing the debt, then the creditor will usually get a judgment against you, which turns into a judgment lien on your homestead.
Normally when a creditor gets a judgment lien on someone’s real property, the creditor can start a foreclosure of that lien. That would either force the property owner to pay the lien balance to avoid the foreclosure, or the property would get foreclosed and the creditor would get paid through that process.
But if the real estate to which the judgment lien has attached is your homestead, then this foreclosure may or may not happen, depending on how much equity you have in the homestead. (“Equity” is the value of the property minus the mortgage(s) and any other liens that are legally in a stronger position than the judgment lien.) If the amount of equity is less than the $40,000/$50,000 exemption limits, then the creditor CAN NOT foreclose. If the amount of equity is MORE than those exemption limits, then the creditor CAN foreclose, but you would be paid the full exemption amount before the creditor would be paid any of its judgment.
Home Protected from Judgment Lien Foreclosure
One example, with a single person’s exemption, where the homestead exemption protects the home from foreclosure by a judgment creditor:
House value: $250,000
minus Mortgage: -215,000
equals Equity: 35,000
minus Homestead:- 40,000
equals $ 0 available to pay judgment
In this situation, no matter how large or small the creditor’s judgment, because there is no equity beyond the homestead exemption, the creditor would not be able to foreclose on the homestead property to get its judgment paid.
However, the judgment lien would remain attached to the property. Therefore the lien would still have to be paid if the equity in the property increased beyond the homestead exemption amount (through increase in the property’s value and/or pay-down of the mortgage). And the judgment lien would have to be paid whenever the house was sold. Unless the judgment lien was gotten rid of in the meantime, for example, through a bankruptcy (more on that in later blog.)
Home NOT Protected from Judgment Lien Foreclosure
Another example, again with a single person’s exemption, where the homestead exemption DOES NOT protect the home from foreclosure by a judgment creditor:
House value: $270,000
minus Mortgage: - 195,000
equals Equity: 75,000
minus Homestead - 40,000
equals $35,000 available to pay judgment
In this situation, if the judgment of the creditor was for $35,000 or less, that judgment would be paid in full through foreclosure of the homestead (or the homeowner somehow paying off the lien to avoid its foreclosure). That’s because there is enough equity beyond the homestead exemption to do so. And the homeowner would first receive the $40,000 exempt amount.
If the judgment was for more than $35,000, than the creditor would receive no more than $35,000, and again only after the homeowner would first receive the $40,000 exempt amount.
For most of our clients, especially in today’s depressed housing market, having too much equity—more than the homestead exemption—is not a problem. And even if it were, there are usually bankruptcy tools to deal with it. (See our earlier blog: “The Power of Chapter 13 to Save Your Home (and its Limitations)—Part 1”)
Creditors Which Trump the Homestead Exemption
There are some kinds of creditors where the homestead exemption does not even apply:
a. Mortgages and trust deeds come ahead of the homestead exemption. This includes not just first mortgages or those used to buy the house, but also home equity lines of credit, most home remodel loans, some small business loans, and just about any situation in which you voluntarily put up your house as collateral for a loan.
b. Real property taxes are first in line, ahead of even your mortgages.
c. Homeowner or condominium association dues and charges. This can become a much bigger problem than may seem because sometimes associations impose very large special assessments (such as for major unexpected repairs), and hit you with extra charges such as collection and attorney fees, all of which come ahead of the homestead exemption.
d. Income tax liens, whether by the IRS or the state, are not affected by the homestead exemption.
e. The law puts construction liens potentially imposed by contractors or subcontractors doing repairs or improvements on your home, or those who supply materials for such construction, ahead of the homestead exemption.
f. Under many circumstances, liens for child support obligations come ahead of the homestead exemption.
Even though these special liens cannot be avoided through the homestead exemption like regular judgment liens can, even these special ones can often be handled in a favorable way through certain bankruptcy procedures. Sometimes having these special liens on your property can even be turned to your advantage. We’ll tell you about this in an upcoming blog.
Conclusion
At Oliveros & O’Brien we derive a special satisfaction from helping our clients keep their homes. Please call us at 503-786-3800 or click on “Contact Us” above to schedule a free consultation with an attorney in our office. We would like to help you.
In: Housing