Many bankruptcy clients have complicated lives, and sometimes, their real life stories create interesting bankruptcy law issues. One bankruptcy client asked me this week if she could protect a house under the homestead exemption; the house has a an unusual history. The debtor and her boyfriend lived together in the house six years ago.(House One) The boyfriend paid for and owned the house by himself. Six years ago, in 2004, she and her boyfriend decided to buy and move into a second home (House Two) which they owned jointly. They rented their former residence, House One, for income. In 2006, one of my client’s creditors obtained a judgment against her for $25,000.
In 2007, the couple decided to split up. The boyfriend agreed to convey the legal title to House One to my client, and she signed a quit claim deed to transfer to the boyfriend her interest in House Two. House One and House Two each had mortgages and the two properties had about the same amount of equity in 2007, approximately $50,000 equity each. Now, the client proposes to kick out the month-to-month tenant in House One and move back in. She wants to know if House One would be exempt in bankruptcy as her homestead and whether the homestead would be encumbered by the creditor’s $25,000 judgment in addition to the mortgage.
A judgement which is recorded before a debtor acquires and occupies a homestead attaches the property, and such lien is not avoided in in a subsequent Chapter 7 bankruptcy. If the creditor records its judgment when the property is already the debtor’s homestead then the judgment lien cannot be enforced against what is the debtor’s homestead property.
Although my client occupied House One six years ago, prior to the creditor’s $25,000 judgment she did not own the property nor have an equitable interest because she did not pay for the house. Even if she had owned House One, when she and her boyfriend moved into House Two and rented House One she would have abandoned the homestead protection. House One was not my client’s homestead when the creditor obtained its $25,000 judgment.
The creditor’s judgment against my client attached to House One when the boyfriend deeded the house to my client in 2007. The house was not my client’s homestead in 2007 because she did not occupy the house and still is not living there.
Moving into the house now as a homestead will not enable this client to avoid the lien in a Chapter 7 bankruptcy. Other than this previously recorded judgment lien, the house would be exempt from her other creditors if the she files Chapter 7 bankruptcy. In light of the housing market since 2007 I assume the property has less than the homestead value ceiling for properties acquired within 40 months of bankruptcy. There are no fraudulent transfer issues since the client conveyed an interest in House Two in exchange for title to House One.