Since the 1800’s, Virginia residents have been entitled to protect certain property from the claims of creditors under what is known as the “Homestead Exemption,” which currently comprises section 34-4 of the Code of Virginia.
While the name Homestead Exemption somewhat grandly suggests that it might protect an individual’s residence from creditor claims, the modern effect of the exemption has been far more modest. Until July 1, 2020, the Homestead Exemption entitled an individual (referred to as a “householder”) to exempt from the claims of contractual (but not tort) creditors, any real or personal property not exceeding $5,000 in value (or $10,000 if the householder is age 65 or older), plus an additional $500 for each dependent supported by the householder.
The $5,000 base amount of the Homestead Exemption has not been increased for decades, and its practical value has been eroded by inflation. Indeed, in an 1878 opinion, the Virginia Supreme Court noted that the exemption was then $2,000, a very substantial amount for the time (per the US Department of Labor, in 1878 the average daily wage in the US was $2.31 so $2,000 represented roughly three years average income).
As of July 1, 2020, the Virginia General Assembly significantly increased the value of the Homestead Exemption (at least for homeowners); made it easier for a householder to claim the exemption should the householder file a bankruptcy case; and enabled householders to re-use the exemption over time.
First, the legislature amended section 34-4 to provide that, in addition to the amounts specified above, a householder may exempt from creditor process real or personal property used as the principal residence of the householder or the householders dependents, not exceeding $25,000 in value. With this revision, a 65-year-old householder with a dependent can now exempt $35,500 in equity in a principal residence ($10,000 + $25,000 + $500 = $35,500).
Given modern home prices, even a $25,000 increase in the exemption falls well short of a full exemption of the equity in the principal residence of many householders. Likewise, the increase does not benefit renters who have no equity in real estate to protect. Nonetheless, the enhanced value of the exemption represents a recognition that inflation had substantially diminished the protection it afforded distressed householders, while not tipping the balance in favor of debtors so substantially that the exemption might increase the cost of credit.
Second, the General Assembly simplified the procedure by which a householder can claim the Homestead Exemption in a personal bankruptcy case. Specifically, the legislature amended sections 34-6 and 34-14 to provide that, to claim as exempt in a bankruptcy case the real and personal property protected by the Homestead Exemption, it is sufficient for the householder/debtor to identify the property in question on the householder’s schedule of exempt property filed with the federal bankruptcy court. These amendments eliminate the requirement that, to take advantage of the Homestead Exemption, a householder file a “homestead deed” identifying the property to be protected, in the county or city where such real property is located or the householder resides. Note that a householder must still file a homestead deed to take advantage of the Homestead Exemption in the absence of a bankruptcy filing.
Third, section 34-21previously provided that when the maximum amount of property had once been set apart by a householder under the Homestead Exemption, the exemption was permanently exhausted. As of July 1, 2020, the General Assembly amended section 34-21 to provide that any amount of value used under the Homestead Exemption may be reused after eight years. The ability of a householder to re-use the Homestead Exemption now corresponds with the eight-year interval in the Federal Bankruptcy Code before a debtor in a Chapter 7 or Chapter 11 bankruptcy case can obtain a new discharge of debt.
A last note: under the Bankruptcy Code each state has the option of allowing its residents to choose between a uniform set of federal exemptions or the state’s own exemptions or, instead, to limit residents to its state exemptions. The federal exemptions include an exemption of up to $25,150 for equity in a principal residence which is comparable to Virginia’s new principal residence equity exemption. Nonetheless, the federal exemptions also include a “wildcard” exemption of up to $12,575 of any unused amount of the federal personal residence exemption, thereby benefiting debtors, such as renters, who have no home equity to protect. Virginia, which restricts residents to its own exemptions, has no comparable provision for those who lack home equity.
Luis F. Ruiz