The homestead exemption is designed to protect the equity in a debtor’s principal residence. When a debtor files for bankruptcy and has an interest in a principal residence, a portion or all of the equity interest in the homestead is protected. The level of protection the homestead exemption offers varies state by state.
While the homestead exemption allows a debtor to protect a portion of his principal residence from bankruptcy creditors, the protection is not absolute. 11 USC 522(o) allows a trustee or creditor to challenge a debtor’s homestead exemption and provides a look back period of 10 years. Stated differently, the Court may look back 10 years to discover how a debtor obtained the money to purchase his or her home. A Section 522(o) action is fact intensive and is decided on a case-by-case approach.