In Washington state, debtors who want to file for bankruptcy are allowed to exempt (“protect”) up to $125,000 in equity in a primary home located in Washington under RCW 6.13 and up to $15k in property used as a homestead. Washington state is considered raising the homestead exemption in a proposed bill SB 5408. *UPDATE*: The homestead bill is was signed into law on 5/13/2021 to raise the homestead exemption to the median sale price in your county from the prior year based on data found here. I had the chance to discuss whether the Washington state homestead exemption should be increased on 1150AM KKNW and you can listen to that segment here:
Typically in order to claim the Washington state homestead exemption, a debtor must live in a home as their primary residence and for bankruptcy purposes have lived in Washington 2 years ago to claim Washington state bankruptcy exemptions, as exemptions are typically based on where a debtor was living 2 years prior to filing a bankruptcy case. Finally, federal bankruptcy law under 11 USC 522(p)(1) states that, the debtor may not exempt “any amount of interest that was acquired by the debtor” in the homestead property by the debtor during the 1,215 day period before filing of the petition that exceeds the amount of $170,350 (it’s likely this number may be doubled for a married couple filing a joint bankruptcy case but still needs to be tested in WA courts). This cap does not apply to any interest transferred from a debtor’s previous principal residence to the debtor’s current principal residence, if the debtor’s previous residence was acquired before the 1,215 day period and both the previous and current residence are in Washington State. Furthermore, a homestead exemption may be limited to $170,350 amount if the debtor has been convicted of certain criminal conduct under 11 U.S.C. 522(q)(1)(A) that would cause the bankruptcy filing to be an abuse or if the debtors has incurred debts due to certain wrongful conduct per 11 U.S.C. 522(q)(1)(A). Finally a debtor can get around these exceptions to the rule under 11 U.S.C. 522(q)(2) which provides that if the amount of any interest in the homestead property is reasonably necessary for the support of the debtor and any dependent, the exceptions may not apply and there may not be a cap on the homestead exemption to limit the Washington State Exemption.
Therefore, if you have acquired an interest in your homestead within 1,215 days and have significant equity in your home you should take extreme caution and conduct research in claiming the max Washington State homestead exemption above $170,350 prior to filing a chapter 7 bankruptcy to avoid any complications in your bankruptcy case or losing a home to a bankruptcy trustee. This limited exemption amount will be adjusted for inflation every 3 years.
This homestead exemption was last updated in 2007 and If you have been paying attention, the real estate market in Washington state and King County in particular has soared since 2007 and the current Washington state homestead exemption is not enough to protect most homes of debtors who want to file for chapter 7 bankruptcy. This either eliminates chapter 7 bankruptcy as an option or forces debtors to consider an expensive chapter 13 bankruptcy repayment plan or not qualify for bankruptcy altogether.
In a chapter 7 bankruptcy a bankruptcy, a trustee appointed to the case can seek to sell a home to make money for a debtors creditors if a home has more than $125,000 of equity. They can even leave a case open and wait for the home to appreciate in a hot market which may force many debtors to file for chapter 13 bankruptcy or not be able to file bankruptcy at all because they cannot afford a chapter 13 repayment plan. This is a big problem because many debtors may not realize the their home has appreciated significantly or that it could appreciate during the course of their case, even after they get a discharge of their debts.
The good news is that help may be on the way in the form of SB 5408 which proposes to raise the homestead exemption from $125,000 to the median value per county of a single-family home. It ensures bankruptcy filers won’t lose their homestead exemption due to property value increases after the date of filing. The Washington state homestead exemption is currently one of the lowest in the country and increases in home prices have dramatically reduced the value of the exemption throughout the state.
SB 5408 is currently making its way through the Washington state legislature and provides critical protection for homeowners outside the bankruptcy process. An effective homestead exemption protects a debtor’s home and makes it easier for debtors to negotiate with creditors outside of bankruptcy as creditors may not be able to get to equity in a home if the homestead is increased.
An increased Washington state homestead exemption helps build wealth in communities of color. Communities of color have been disproportionately impacted by Covid-19, and are more likely that White homeowners to default or ask for mortgage deferments.
An increase in the Washington state homestead exemption helps homeowners protect all manner of homeownership including small farms, RV’s and vehicles. A homestead consists of all real and personal property that the owner uses as their principal residence. The Bill will prohibit dollar value restrictions on the personal property.
SB 5408 also helps protects debtors who are already in a bankruptcy case. Currently, debtors who qualify can still lose their home if its value increases during the case as all equity goes to a chapter 7 trustee post filing. SB 5408 enables debtor to claim a future exemption in value as of the date of filing.
SB 5408 provides real, tangible relief to vulnerable working people and all homeowners without taxpayer money.
If you live in Washington State, and have questions about the Washington State Homestead exemption or are concerned about protecting your home in bankruptcy, give Symmes Law Group a call at 206-682-7975 or contact us to get the counsel you need.