Interesting Homestead Issue In Bankruptcy Court

While waiting my turn in a bankruptcy courtroom I heard a debtor’s attorney and a bankruptcy trustee argue an interesting homestead case. The debtor purchased a single family townhouse as his principal residence. After the moved in he created a separate living quarters for his mother-in-law by erecting drywall partitions and building a small kitchen area for the mother-in-law. He transformed the house into two separate living units. The debtor claimed the entire property as his homestead in his Chapter 7 bankruptcy. The Trustee argued that the homestead exemption did not apply to that portion of the property occupied by the debtor’s mother-in-law and that a proportionate amount of property value was non-exempt and could be taken by the Trustee. The Trustee said that only the debtor’s portion qualified as homestead because it was the only area occupied by the debtor and his family.

The bankruptcy judge denied the Trustee’s objection to homestead protection. The judge noted that the property had only one tax id number and legal description, and zoning prohibited subdividing the property into a separate residence for the mother-in-law. The judge also said that the debtor had intended the property as a family home and had subdivided the unit physically to afford privacy to his mother in law. The judge said the result would be different if a person physically subdivided the interior of a property to take in an unrelated tenant who paid rent.

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