Protecting your personal residence is very important, and your options vary depending upon where your home is.
The first means is through a homestead exemption. Each state has a different rule on homesteads. (But the common rule is that you only get one homestead no matter where you live.) In some states, such as Texas, Florida and Kansas, there is an unlimited homestead, meaning a creditor can’t get at your home. In other states, the homestead is a fixed dollar amount. In Nevada, the homestead is a generous $550,000 whereas in California it is only $75,000 in extra protection. (For each state’s amount visit www.corporatedirect.com)
The homestead, when properly filed with your county recorder, works as follows: If you have a $1 million home with a $450,000 first deed of trust against it, you have $550,000 in equity exposed. In Nevada, for example, you file the homestead exemption (which protects $550,000) and your property is fully encumbered. Creditors can’t reach the equity. The $550,000 in equity is yours ahead of any creditor.
In California (which only protects $75,000) a homestead filing in the same example would leave $475,000 in equity exposed. ($1 million value, less $450,000 first, less $75,000 homestead equals $475,000 exposure.) To further encumber the property an LLC can be used. But know that a homestead can’t be filed to protect a personal residence in an LLC. A homestead only works for your personal residence in your individual or family trust name. Also know that California has a bankruptcy case dictating that an LLC does not protect a personal residence in bankruptcy. That said, an LLC for a personal residence with equity well above the homestead limits may be your best strategy against creditors outside of bankruptcy.