District of Columbia Homestead Exemption: Significant Protection for Honest (and Maybe Not So Honest) DC Homeowners
When considering bankruptcy, many homeowners confront an initial and crucial question: If I file for bankruptcy, will I be able to keep my home? In the District of Columbia, the answer is yes, based upon the homestead exemption provided under the District of Columbia Code (the “DC Code”). Specifically, Section 15-501(a)(14) of the DC Code (the “Homestead Exemption”) provides that a DC resident’s home is “free and exempt” from “attachment, levy or seizure and sale on execution or decree of any court in the District of Columbia…” in its entirety.
If a DC resident homeowner decides to file for bankruptcy under Chapter 7, the homeowner may use this Homestead Exemption to shield or “remove” their principal residence from administration by a Chapter 7 trustee, and maintain ownership of their home. The homeowner must, of course, continue to pay the regular expenses for the principal residence, i.e., mortgage and taxes, etc., or face foreclosure.
The Homestead Exemption provides a significant benefit to homeowners in the District of Columbia by allowing them to discharge virtually all of their unsecured debt in Chapter 7 (subject to those debts that cannot generally be discharged, such as student loans, taxes etc.), without jeopardizing the continued use, possession and ownership of their home.
In Maryland, individuals who file Chapter 7 are provided a much more limited homestead exemption, and may face the loss of their home through a sale by a Chapter 7 Trustee. Overall, the DC Homestead Exemption provides critical protection for homeowners in the District of Columbia who, when faced with economic hardship and the necessity of filing bankruptcy under Chapter 7 may, at a minimum, preserve their home from creditor claims.
At times, the DC Homestead Exemption may also have unintended consequences. Specifically, in some cases, a homeowner may attempt to use their principal residence to shield “ill-gotten gains” from a prior improper or illegal transaction. For example, an individual may own real property with other family members or friends in the District of Columbia. The individual may attempt to sell the property, through fraud or deception, without the knowledge or consent of the co-owners. The deceptive seller may then seek to use the proceeds of the sale to purchase a new (or other) principal residence in the District of Columbia, thereby acquiring the property through the funds obtained as a result of the homeowner’s fraud and deception. Despite the nefarious basis and the use of such “ill-gotten gains” for the purchase of the residence, the property could be fully exempt from the claims of creditors under the DC homestead exemption.
The DC Homestead Exemption was intended to protect honest residents of the District of Columbia who face financial hardship from losing what is often their most valuable and important possession: their home. At the same time, this sweeping exemption may, in some instances, have the unintended consequence of permitting a resident who engages in fraud or economic wrongdoing to preserve their “ill-gotten gains” by using them to acquire a DC residence.
By utilizing the Homestead Exemption, the owner may shield the property obtained through their fraud or economic wrongdoing from the claims of creditors, including the victims of the resident’s fraud. While this result may appear anomalous, it is a reality to the victims of the seller’s fraud or deception.
For additional information regarding the District of Columbia homestead exemption, or filing bankruptcy in Maryland, DC or Virginia, contact Chris Hamlin or any other member of the firm’s Bankruptcy Group; Steve Goldberg, Janet Nesse, Craig Palik, or Justin Fasano.
Disclaimer: The opinions raised in this blog are solely those of the author. The information contained in this blog is general in nature and is not offered, and cannot be considered as legal advice for any particular situation.