Buy a house, rework your mortgage, or even apply for a loan and within days you’ll start receiving the kind of junk mail that usually warrants a second look – full of businesslike bold fonts, maybe even in red:
YOU COULD LOSE YOUR HOME IF YOU DON’T ACT IMMEDIATELY!
Sometimes the sender will go to the trouble of printing on the envelope the punishment prescribed in the United States Code for anyone but the addressee opening the letter. This lets you know that the sender means business. You open the letter and it tells you (in language much more ominous than our paraphrasing) that since you’re now a homeowner, or a potential homeowner, you could rejoin the unfortunate ranks of the renters once again with one simple legal slip-up. If someone sues you – too regular an occurrence in a society that’s now descended from litigious to ultralitigious – and should that plaintiff win a large enough amount, you could be forced to sell your house to pay the judgment. So what size barrel do you wear?
Therefore, you should immediately spend $95 or $150 with the homestead registration company that altruistically informed you of the precarious position that you’re now in.
It’s technically true that your home might be at risk, but this remains about the biggest scam this side of recommended rustproofing on a factory-new vehicle.
Simply put, here’s the extremely common situation that these companies try to exploit:
You buy a house. Regardless of how many houses or other pieces of real estate you own at a given time, one of them has the legal status of being your primary residence. Should you ever lose a court ruling and end up owing more than you can pay, whoever sued you could legally take your keys and march on in.
Except they can’t. There’s something called a homestead exemption that protects your house no matter what. Regardless of how much you owe, the legal principle that you’re entitled to quiet enjoyment of your home takes precedence over just about everything. Even Bernie Madoff got to keep his Park Avenue apartment, or would have if he hadn’t signed a 150-year lease to move to this idyllic setting in Granville County, North Carolina.
But if you own a house, you probably already have an automatic homestead that covers any danger. You don’t have to fill out any paperwork. If you can prove that the residence is indeed your primary one – which shouldn’t be too difficult – the most bellicose lawyer on the planet can’t touch it.
How come I didn’t know this?
Why would you? Who bothers to advertise it? Twisting up a Glad lawn & leaf bag over your fingers is the best way to safely remove a broken light bulb’s Edison screw from its socket, but that particular feature isn’t listed on the package.
So I can go around incurring debts, scamming people, spending money foolishly and daring people to sue me, knowing full well that my home is impervious to their lawyers’ petty threats?
Don’t go crazy. Somewhat obviously, if your house gets foreclosed on you don’t get to stay in it, even if you have nowhere else to go. The IRS will gladly take your house, too, maybe even just for sport. So pay your federal taxes.
If you declare bankruptcy, you also cede your homestead exemption in some instances, although there isn’t a bankruptcy judge in the nation who will kick you out on the street.
But pay your child support and alimony, you deadbeat. You also need to pay any mechanic’s lien, which is a legal term that refers to services rendered by a contractor that you never bothered paying for and that the contractor formally fought to recover. (That’s largely theoretical, mind you. It’s hard to imagine an unpaid driveway paving bill being large enough to force you to liquidate your house, or a homeowner being stubborn enough to refuse to pay and thus risk losing his house.)
It’s mostly general creditor claims that a homestead declaration protects you against. Unpaid medical bills, credit card debt, and other stuff you would never have incurred in the first place had you read Control Your Cash: Making Money Make Sense. However, there’s nothing in the book about how to fight off lawsuits, which you can’t control.
Also, vacation homes aren’t eligible for homestead exemptions – unless you want to start living in yours 183 days a year, and somehow do so retroactively, which would turn your primary residence into your secondary residence.
Is there any set of circumstances under which I should register my homestead?
Yes. For 6 months after you sell your house, if you can feel creditors breathing down your neck. If for whatever reason you’ve sold your house and haven’t yet bought a new one, your creditors can’t go after the cash proceeds from the sale.
It costs almost nothing to do this. Maybe a $15 filing fee, that’s it.
Of course, chances are pretty good that no one’s suing you for enough that you’d risk losing your house anyway. But because many people overestimate the risk of this happening, and therefore panic, that’s how homestead protection companies find their market of suckers.
One last thing: most states set a limit on the amount you can protect. $550,000 is standard.
But say you’ve reached the point in life where you’re sufficiently accomplished to have paid off your mortgage and have $551,000 in equity cooling in your house, even after the market falls. Yes, if anyone gets a judgment against you you’d conceivably have to sell your house.
Of course, if you’re this successful then you’ve already created an LLC or S corporation to anticipate this eventuality and protect yourself, right? (We could link to any one 20 guest posts we’ve written on this. Here’s a random one.)