Interesting Question About Homestead Exemption In Bankruptcy

I enjoy getting challenging questions for readers, especially from other attorneys. I write my blog entries for "people" as opposed to attorneys, so I am flattered that any attorney would find my comments interesting. Here’s an interesting email from a Florida attorney:

I also have a fact pattern that I would like your opinion on. Assume that an individual refinanced a homestead property over three years ago and took the cash from the refinance and used it to purchase and renovate another property. He owns the second property as tenants in common with another unrelated individual. Following the completion of the renovation, the individual moves into the second property and makes it his homestead. He then rents out the original property to cover the costs of the mortgage.

Three years have now passed. He is no longer able to make the adjustable rate payments on the original property that is now rented. He also has other credit card debt that he would like to discharge and he is considering filing for Chapter 13. He would like to discharge the credit card debt as well as to surrender the original property (now $100,000 underwater) to the lender in the 13. He is concerned about protecting the equity in his homestead (approximately $50,000) from creditors in the 13.

Based upon my knowledge (and what I have learned from your analysis in the blog), I would assume that the trustee or the judge would need to find that he intended to file at the time of the transfer and that he knew the asset would not be exempt in the bankruptcy. If the potential debtor had no intention of filing and the asset was exempt at the time of the transfer (a homestead to homestead transfer), the equity would be safe from attack.

This is my opinion for what its worth: If the person sold the first house and put the $50,000 proceeds in a bank account while he searched for a new homestead the money would remain exempt homestead property until the new house was purchased. That’s not what happened. When the person purchased the new house as tenants in common I do not think the new house was protected homestead just because the person may have intended to occupy the house at some point. I think the person’s tenant in common (50%) interest in the new house is protected once he moves in and makes the new home his primary residence.

I do not think a bankruptcy court would deprive the debtor of a homestead exemption in the new home. The bankruptcy petition will have been filed over three years after the debtor moved into his new homestead. He purchased the property over three years ago (the purchase date is not specified in the question) The trustee would have to prove a fraudulent conveyance under Florida’s fraudulent conveyance statutes as opposed to the applicable sections of Bankruptcy Code. because the property became homestead and was purchased over two years before the filing. I do not see a strong case of the debtor’s intent to defraud creditors. Florida law is supposed to apply homestead exemptions liberally for the benefit of the debtor’s family. Also, I do not think there is such thing as a "fraudulent move" so I think the transfer date, for fraudulent conveyance purposes, would date back to the time of purchase of the second property as opposed to the time of occupancy. All things considered, this fact situation should withstand a challenge to the debtor’s homestead exemption.

 

 

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