How Nevada’s Homestead Exemption Really Works in Bankruptcy

The homestead exemption is a way for homeowners facing bankruptcy to protect their primary residence against creditor claims. Nevada offers one of the most generous homestead exemptions in the nation. In bankruptcy, however, the key issue is not the home’s value, but the amount of equity in the home – and how that equity is covered by the exemption. 

A home’s equity is calculated by subtracting outstanding loans based on valid liens, such as mortgages, from the home’s fair market value as of the bankruptcy filing date. If the amount of the equity is below the homestead exemption amount, which is currently $605,000, the home is generally safe from liquidation in Chapter 7. If there is nonexempt equity, the trustee may seek to sell the property or negotiate a way to pay the excess value into the estate for repayment to creditors.

In Chapter 13, the home will not be liquidated. Instead, the exemption affects how much the debtor will have to repay their creditors. If the equity exceeds the homestead cap, the debtor must pay the value of the excess equity to their unsecured creditors over the life of their repayment plan. 

Timing is critical for debtors who want to make the most of this exemption. Nevada requires homeowners to file a Declaration of Homestead before the bankruptcy petition is filed. Recent increases in property values can also have a significant impact on a debtor’s situation. Because bankruptcy courts look at fair market value as of the bankruptcy filing date, rapid appreciation can push equity above the exemption limit, even if the homeowner has not made substantial mortgage payments. That change can determine whether Chapter 7 is viable or Chapter 13 is a safer route.

For example, a debtor has properly recorded their Declaration of Homestead and their home’s fair market value is $900,000. If they have a mortgage balance of $350,000, their equity would be $550,000. Because the equity is below the $605,000 homestead exemption, all the equity is protected. 

Imagine, however, that the market rises before the debtor files for bankruptcy protection, increasing their home’s market value to $1,050,000. That would increase their equity to $700,000, which leaves $95,000 not covered by the exemption. In Chapter 7, the trustee would decide whether a sale would realistically produce funds that could be used to pay creditors. If so, they could force the home’s sale or require the debtor to somehow pay the nonexempt amount into the estate. In Chapter 13, the debtor would still keep the home, but would generally need to repay an additional $95,000 to their creditors over their three- or five-year plan.

Nevada’s homestead exemption is powerful, but it is wise for debtors to speak with an experienced bankruptcy attorney about the options so that a clear strategy can be developed prior to filing. 

At Miller Law, Inc., our Winnemucca attorneys offer comprehensive guidance for homeowners considering bankruptcy. Please contact us online or call 775-623-5000 to schedule your initial consultation.