Pre-Bankruptcy Planning: Court Allows Large Cash Investment in Homestead Same Month Bankruptcy Filed

Some people think about protecting liquid assets in bankruptcy by paying advance mortgage payments or paying down mortgage principal on their homestead property prior to filing. Most bankruptcy attorneys will caution clients that paying extra money toward your homestead within two years (and possibly in some cases to 10 years) prior to filing bankruptcy will either forfeit the money paid toward the house or even cause a complete denial of your bankruptcy discharge. A recent court decision from the 8^th Circuit Court of Appeals seems to provide debtors greater leniency to shelter money in their exempt homestead. In this case the court permitted the debtors to exempt approximately $140,000 applied to their homestead mortgage within 30 days prior to their bankruptcy filing.

The case is In re Wilmoth, 397 B.R. 915. Its an Arkansas case; Arkansas allows unlimited homestead exemption. The Circuit Court  stated that even though the debtors’ mortgage payments showed some indication (or badges) of fraudulent conveyance the court would not penalize the debtors because there was insufficient evidence that the debtors had an actual intent to defraud their creditors. This case had relatively complex facts, and there were many facts which distinguish the Wilmoth case from a typical situation when a debtor thinks about sheltering money in their exempt homestead. For example, the court noted that the Wilmoths did not liquidate or hide in their homestead substantially all their non-exempt assets, they fully disclosed all financial activity, and that they relied on good faith advice of their attorney. The Wilmoth holding may not apply to another debtor who invests all their liquid cash into a homestead prior to filing bankruptcy. Nevertheless, the holding provides a relatively liberal opinion of pre-bankruptcy planning. The 8^th Circuit court noted in its opinion that the 11^th Circuit Court of Appeal (the Circuit that rules on Florida cases) has not published any opinions on the propriety of pre-bankruptcy exemption planning. Read the opinion before you try to invest money in your own homestead and file bankruptcy; make sure the facts in this case a similar to your own situation before you plan to rely on the opinion.

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