Doubling Homestead Prior to Filing Bankruptcy

There is a fine line between permissible pre-bankruptcy planning and impermissible fraudulent conveyances. The new bankruptcy law’s homestead rules provide an interesting example. The new bankruptcy law exempts $125,000 of homestead equity acquired within 40 months prior to filing. Homestead interests acquired prior to 40 months, or 1215 days, is exempt in Florida. Most attorneys interpret the new law to double the exemption up to $250,000 where a home is jointly owned by husband and wife where the spouses file a joint bankruptcy petition.

In some cases, a married couple own their homestead in the name of one of the spouses individually. If the spouses faced the prospect of a joint bankruptcy to discharge unsecured debts, transfer of the homestead title to joint ownership prior to filing would increase the permitted exemption to $250,000. The issue is whether such transfer would be undone in bankruptcy because it is a fraudulent conveyance.

I am unaware of any court decisions which have addressed this question. On one hand, as both spouses live in the house joint ownership is expected. Also, such a transfer is not being made to a non-debtor in order to keep the property out of bankruptcy. However, the transfer looks like a fraudulent conveyance to the extent there is no consideration and is made to a family member. If the property was once in joint name before being titled individually, a return to joint ownership may be more easy to defend. I expect that a Chapter 7 trustee would challenge the transfer and the combined homestead exemption, but it is not clear how a court would rule.

posted by Jonathan Alper, asset protection and bankruptcy lawyer, Orlando, Florida