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Norton Bankruptcy Law and Practice 2d

Author johnbsims3
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#1 | Posted: 18 Dec 2006 17:03 
2 Norton Bankr. L. & Prac. 2d § 46:10
Norton Bankruptcy Law and Practice 2d

William L. Norton, Jr.
Chapter 46. EXEMPTIONS (Code § 522)
The Contributing Editor for Chapter 46 is Professor Margaret Howard, Washington and Lee University School of Law, Lexington, Virginia.


§ 46:10. Homestead Exemption

Bankruptcy 2774
Section 522(d)(1) allows an exemption, not to exceed $18,450, as of April 1, 2004, in value in real or personal property[FN1] used as a residence by the debtor or a dependent, or in a burial plot for the debtor or a dependent.[FN2] This is known as the "homestead" exemption. Although the statute uses the term "residence," the courts interpret it to correspond with "homestead" under state law.[FN3] Thus, only the place the debtor actually occupies as a home can be exempted as a homestead.[FN4] The homestead exemption is not lost, however, when the debtor is temporarily absent for reasons such as ill health[FN5] and divorce proceedings.[FN6] The exemption may be lost, however, if the debtor acquired the asset with funds inappropriately diverted from the reach of creditors.[FN7]
Because the exemption is limited to "the debtor's aggregate interest," the value of the exemption depends upon the equity (if any) in excess of unavoidable liens.[FN8] The exemption is a relatively small amount[FN9] and any excess equity remains property of the estate. The trustee must sell the property in order to realize the excess equity for the estate, so the homestead exemption will not enable the debtor to keep the home whenever its value exceeds the sum of liens plus the homestead exemption.[FN10] Debtors who continue to occupy the house pending sale cannot be charged rent for the period of that occupancy.[FN11]
If no excess equity is available, the estate will have no interest in the property and the trustee will abandon it.[FN12] The property, however, remains subject to any unavoided lien,[FN13] so the debtor who wants to keep the property following abandonment will have to make satisfactory arrangements with lienholders.
Courts disagree on whether the homestead exemption can be claimed from the proceeds of a prepetition sale of the debtor's home.[FN14]Section 522(d)(1) by its terms applies only to the debtor's "residence" and no mention is made, as it is in other subsections of § 522(d),[FN15] of proceeds. State homestead exemptions have been extended to proceeds despite a similar absence of reference to proceeds, however,[FN16] so the federal statute's silence does not end the inquiry.[FN17] If the proceeds in question are received from insurance coverage paid because of a postpetition fire that destroyed exempt property, the homestead exemption can be claimed from the proceeds.[FN18]

[FNa] William L. Norton, Jr., Author and Editor-in-Chief, United States Bankruptcy Judge 1971-1985; Attorney at Law, Gainesville, Georgia; Editor-in- Chief, Annual Survey of Bankruptcy Law; Faculty, Federal Judicial Center, Seminars for Bankruptcy Judges; Adjunct Professor, Emory University School of Law; Chairman, Committee on Bankruptcy Rules and Local Rules, National Conference of Bankruptcy Judges

[FN1] Thus, the debtor can claim the homestead exemption in a mobile home that constitutes personal property under state law. See, e.g., In re Irwin, 293 B.R. 28 (Bankr. D. Ariz. 2003) (holding that the debtors' mobile home qualified for the homestead exemption under state law); In re MacLeod, 295 B.R. 1 (Bankr. D. Me. 2003) (permitting the debtor, who operated a 19-acre mobile home park and lived in a double-wide on one of the lots, to claim a personal property exemption in the double-wide; but denying a homestead exemption in the real property because the state exemption is use-oriented and the real estate was used for commercial, not residential, purposes); In re McClain, 281 B.R. 769, 48 Collier Bankr. Cas. 2d (MB) 1617 (Bankr. M.D. Fla. 2002) (permitting homestead exemption in mobile home; nexus between the motor home and real property, sufficient to satisfy physical permanency requirement, was shown by a permanent sewer and water hookup, underground electricity, and permanent concrete pad); In re Thornton, 269 B.R. 682 (Bankr. W.D. Mo. 2001) (holding that the debtors cannot claim the same dwelling as both a mobile home and a homestead affixed to real estate, since the two are covered by separate state statutory provisions; removal of wheels and tires, installation of skirting, placement of the structure on blocks, and attachment of the structure to its own well and septic system all indicate an intent to convert the mobile home to real estate); In re Dipalma, 24 B.R. 385, 9 Bankr. Ct. Dec. (CRR) 1131 (Bankr. D. Mass. 1982). Compare In re Cobbins, 227 F.3d 302, Bankr. L. Rep. (CCH) P 78277 (5th Cir. 2000) (holding that the debtor is not entitled to claim a homestead exemption in a mobile home, under Mississippi law, when the debtor did not own the land on which the home was located; the state homestead exemption statute focuses on the ownership of the land, and the exemption is only available to a landowner or a person with an assignable interest in the land), with In re Carlson, 303 B.R. 478 (B.A.P. 10th Cir. 2004) (holding that Utah's homestead exemption statute does not require the owner of a mobile home to own the surrounding land in order to exempt the mobile home).
[FN2] It usually goes without saying that the homestead exemption can be claimed only in property in which the debtor has a legal interest. See, e.g., In re Cohen, 263 B.R. 724 (Bankr. D. N.J. 2001) (holding that debtor-wife could not claim, under § 522(d)(5), a portion of the unused homestead exemption when she had no ownership interest in the house); In re Miller, 255 B.R. 221 (Bankr. D. Neb. 2000) (holding that debtor-wife could not claim a tool of the trade exemption in a truck titled in debtor-husband's name).

That interest need not be fee simple ownership, however. In In re Cantrell, 270 B.R. 551 (Bankr. D. Conn. 2001), debtor attempted to claim a homestead exemption in property titled in her husband's name on the grounds of a claimed beneficial interest in a resulting trust. The court denied the exemption not because of debtor's lack of ownership, but because she failed to establish her trust theory. Debtor had provided the down payment, but the court found that it could have been intended as a gift to her husband. She had also entered into agreements with the real estate agent and mortgage brokers, and had paid the brokers' fee from an account held jointly with her husband, but those acts may only have indicated debtor's intent, at some point in time, to take a record interest. She had, apparently, followed the brokers' advice that the title be put in the husband's name in order to get a lower interest rate, and doing so was consistent with her stated intent to contribute toward purchasing a home for herself and her family. See also In re Stenzel, 301 F.3d 945, Bankr. L. Rep. (CCH) P 78713 (8th Cir. 2002) (holding that the debtor's ignorance of his ownership interest in a parcel conveyed to him and his siblings by their parents, with a life estate retained by their mother, is relevant to the determination of debtor's right to claim a homestead exemption in that parcel); In re Johnson, 375 F.3d 668, Bankr. L. Rep. (CCH) P 80127 (8th Cir. 2004) (debtor's lien interest in former wife's residence not eligible for homestead exemption under § 522(d)(1), since neither debtor nor his dependent used lien as residence. Debtor had no ownership or possessory interest in residence and debtor's mere collateral intereest in residence did not rise to level of homestead right under Code); In re Casserino, 290 B.R. 735 (B.A.P. 9th Cir. 2003), aff'd, 2004 WL 1812176 (9th Cir. 2004) (holding that debtor-lessee was the owner of a possessory interest in the leased premises and, therefore, entitled to claim a homestead exemption to the extent of that interest, including his interest in prepaid rent and the refundable portion of the security deposit).
[FN3] In re Tomko, 87 B.R. 372, 19 Collier Bankr. Cas. 2d (MB) 16, Bankr. L. Rep. (CCH) 72376 (Bankr. E.D. Pa. 1988). But see In re Marsico, 278 B.R. 1, 2002 BNH 15 (Bankr. D. N.H. 2002), subsequent determination, 49 Collier Bankr. Cas. 2d (MB) 1085, 2002 BNH 34, 2002 WL 31572686 (Bankr. D. N.H. 2002).

Some state homestead provisions limit the exemption to the head of a household or family. The court held in In re Dubsky, 2002 Bankr. LEXIS 1799 (Bankr. D. Neb. 2002), that marriage is the triggering event, even though the end of the marriage does not result in the loss of the exemption.

Whether the debtor was the head of her family was at issue in In re Plaster, 271 B.R. 202 (Bankr. M.D. Fla. 2001). The court held that the debtor had failed to establish that she was the head of a family consisting of herself and her aunt. Although she took care of her aunt, she did not show that she had personal authority over her aunt, responsibility for her aunt, or an obligation to her aunt. Nor was there evidence showing that the aunt recognized the debtor as the head of her family.

The Texas exemption is available only to the head of a family. In PaineWebber, Inc. v. Murray, 260 B.R. 815 (E.D. Tex. 2001), creditors argued that a premarital agreement limiting support after divorce made debtor's support obligation, as head of the family, obsolete. The court held, however, that the support obligation continued despite the agreement. Thus, the bankruptcy court did not commit reversible error when it found that debtor and his wife were a family, and that debtor was entitled to the homestead exemption.

Only one person in each family can claim a head of household exemption. In re Soper, 258 B.R. 748 (Bankr. W.D. Mo. 2001) (applying Missouri law).
[FN4] In re Fiffy, 293 B.R. 550 (B.A.P. 1st Cir. 2003) (approving claims of homestead exemptions in contiguous parcels; the test is actual use and occupancy in connection with debtor's principal residence); In re Hughes, 306 B.R. 683 (Bankr. M.D. Ala. 2004) (permitting exemption in parcel debtors owned adjoining leased land on which debtors resided in a mobile home; debtors' use of the parcel to park cars and as a playground for their children was sufficient to establish that they occupied the parcel, as required by state law governing the homestead exemption); In re Simmons, 308 B.R. 559 (Bankr. M.D. Ala. 2004) (holding debtor not entitled to claim homestead exemption when he moved out following separation from his wife, despite his hopes for reconciliation; in Alabama, both ownership and occupancy are prerequisites to the homestead exemption); In re Marrama, 307 B.R. 332 (Bankr. D. Mass. 2004) (permitting debtor-lessor to claim homestead exemption in premises leased to others, because he intended to reside in the property after the lease expired, and he continued to pay the mortgage and to exercise dominion and control over the residence as a landlord); In re Shell, 295 B.R. 129 (Bankr. D. Alaska 2003) (permitting debtor's claim of a homestead exemption in a six-plex in which debtor resided; the only essential elements for the homestead exemption are that the property be the family's actual abode and be owned by a family member); In re Allman, 286 B.R. 402 (Bankr. D. Ariz. 2002) (concluding that state courts would interpret the language "plus the land upon which that mobile home is located" in the state homestead exemption statute to include the entire contiguous parcel of land on which a mobile home sits, regardless of whether it consists of more than one lot on the subdivision plat and regardless of whether the parcels were purchased simultaneously, as long as the entire property is being used for residential purposes); In re Wipperling, 286 B.R. 106 (Bankr. N.D. Iowa 2002) (debtor may claim homestead exemption in newer of two mobile homes on his property, even though he had to get water from the older unit; he occupied the new mobile home as best he could under the circumstances); In re Carey, 282 B.R. 118 (Bankr. D. Mass. 2002) (permitting debtors to claim an exemption in the entire building, even though they occupied only part; the state homestead statute does not provide for partition of the residential portions of the property from the non-residential, indicating that "home" does not mean something less than the whole property); In re Edwards, 281 B.R. 439 (Bankr. D. Mass. 2002) (permitting homestead exemption in contiguous parcel on which debtor's children played and on which he had constructed a garden shed and dog run; speculative future intent to build a home for his daughter on that parcel is irrelevant to actual use on petition date); In re Klaiber, 265 B.R. 290 (Bankr. M.D. Fla. 2001); In re Zantman, 261 B.R. 41 (Bankr. D. Idaho 2001) (without regard to date of acquisition, debtors may claim homestead exemption in three contiguous parcels because debtors resided there and treated them as a single property); In re Sparfven, 265 B.R. 506, Bankr. L. Rep. (CCH) P 78498 (Bankr. D. Mass. 2001); In re Tsoupas, 250 B.R. 466, 2000 BNH 26 (Bankr. D. N.H. 2000) (when debtor owns a half interest in a three-unit building, and resides in one unit that represents 25% of the building's square footage, the homestead exemption is calculated by using the ratio that the square footage of the apartment bears to the entire premises; thus, debtor could claim a homestead equal to one-half interest in 25% of the net value of the premises); In re Pavich, 191 B.R. 838, 35 Collier Bankr. Cas. 2d (MB) 240, 77 A.F.T.R.2d 96-1471 (Bankr. E.D. Cal. 1996) (exemption rights are determined as of the petition date; debtor's later death is irrelevant to homestead exemption rights); In re Cole, 185 B.R. 95 (Bankr. D. Me. 1995) (undeveloped lot cannot be claimed as a homestead exemption); In re Dean, 177 B.R. 727 (Bankr. S.D. Fla. 1995) (debtor may claim exemption under state law in cooperative apartment occupied pursuant to perpetual lease); In re Herd, 176 B.R. 312 (Bankr. D. Conn. 1994) (debtor may claim federal exemption in dry-docked boat, with galley and bathroom facilities and connections to marina's water and electrical supplies, even though debtor occupied the boat in violation of state law); In re Peters, 168 B.R. 710, Bankr. L. Rep. (CCH) 371 (Bankr. D. Idaho 1994) (debtors may claim exemption under state law in motor home, as distinguished from mobile home, that is connected to electrical and water supplies even though it is on land they do not own); In re Goad, 161 B.R. 161 (Bankr. W.D. Va. 1993), overruled on other grounds by, In re Hoss, 233 B.R. 684 (W.D. Va. 1999) (because debtor may claim exemption in mobile home under state law, she may avoid a nonpossessory, nonpurchase money security interest that encumbers it); In re Tomko, 87 B.R. 372, 19 Collier Bankr. Cas. 2d (MB) 16, Bankr. L. Rep. (CCH) 72376 (Bankr. E.D. Pa. 1988) (beach house debtors occupied sporadically during summer is not "residence" and thus is not exemptable under § 522(d)(1)). Compare In re Hacker, 260 B.R. 542, 46 Collier Bankr. Cas. 2d (MB) 581 (Bankr. M.D. Fla. 2000) (motor boats cannot qualify as dwelling places under Florida law and, therefore, cannot be the subject of a homestead exemption), with In re Mead, 255 B.R. 80, 36 Bankr. Ct. Dec. (CRR) 262 (Bankr. S.D. Fla. 2000) (debtor may claim an exemption under state law in a boat on which he resides; the exemption expressly extends to dwellings situated on land debtor leases rather than owns, and connection of the boat to the dock provides sufficient connection to unowned land).

The place the debtor lives on the petition date is the place that is eligible for the homestead exemption, even if the case is later converted to another chapter. In re Alexander, 236 F.3d 431, 37 Bankr. Ct. Dec. (CRR) 56, Bankr. L. Rep. (CCH) P 78343 (8th Cir. 2001) (applying §§ 348(a) and 522(b)(2)(A)); In re Lude, 291 B.R. 109 (Bankr. S.D. Ohio 2003).
[FN5] In re Owens, 269 B.R. 794 (Bankr. N.D. Ill. 2001) (holding that debtor, a nurse, did not abandon her Illinois homestead when she went to care for her mother, taking only necessary clothing, and continued to pay the mortgage while her son and his family lived in the home; although debtor obtained employment in Louisiana in order to meet living expenses and obtained a Louisiana driver's license for automobile insurance purposes, she had not established a new homestead in Louisiana and intended to return to Illinois); In re Johnson, 61 B.R. 858 (Bankr. D.S.D. 1986)(debtor may claim homestead exemption under state law despite residing in nursing home; mere absence from home due to ill health, even if prolonged, does not of itself show debtor either never acquired homestead or later abandoned it, in absence of proof she did not intend to return to her home).
[FN6] In re Patterson, 275 B.R. 578 (Bankr. D. Colo. 2002) (presumption of abandonment, created by the fact that debtors did not reside in the home at the time of filing, was rebutted by showing that their absence was for the purposes of renovating the home and avoiding close proximity to debtor-husband's former spouse); In re Webber, 278 B.R. 294 (Bankr. D. Mass. 2002) (debtor could claim homestead exemption in house occupied by his wife and children, under divorce nisi that was not final at time of filing; requirement of occupancy under state law is a limitation only on acquisition of a homestead, but his family's occupancy was enough to satisfy any occupancy requirement); In re Kimball, 270 B.R. 471 (Bankr. W.D. Ark. 2001) (debtor could claim homestead exemption in property not yet sold at the time of bankruptcy filing, but not physically abandoned, even though a divorce court had ordered its sale and listing agreements had been signed); In re Marsico, 2001 BNH 47, 2001 WL 1757046 (Bankr. D. N.H. 2001) (holding debtors not entitled to claim New Hampshire homestead exemption; they may have changed their domicile by operating a business for six months in New Hampshire, where they owned a second home, but they changed domicile back to New Jersey when they closed the business and returned to New Jersey, agreed to sell the New Hampshire property, and their attorney and accountant were in New Jersey, even though they had a bookkeeper in New Hampshire and stated that they had planned to stay in New Hampshire indefinitely); In re Dawson, 266 B.R. 355 (Bankr. N.D. Tex. 2001) (debtor whose divorce was not final at the time of bankruptcy filing may not claim a homestead different from the family homestead he and his former spouse previously established); In re Leonard, 194 B.R. 807 (Bankr. N.D. Tex. 1996) (debtors did not abandon homestead in city by relocating to rural area for three years in order to educate their children when they testified to intent to return and maintained the telephone, voted, and received mail at the city address); In re Vaughan, 188 B.R. 234 (Bankr. E.D. Ky. 1995) (placing home on the market is substantial evidence of intent to abandon); In re Frederick, 183 B.R. 968, 33 Collier Bankr. Cas. 2d (MB) 962 (Bankr. M.D. Fla. 1995), determination sustained, (May 18, 1995) (property does not lose its character as a homestead under state law when debtor, because of the nature of his work, must establish temporary residences elsewhere; but moving from the premises and putting the property up for sale constitutes an abandonment of the homestead, and a lien that attached thereafter is not avoidable); In re Pham, 177 B.R. 914 (Bankr. C.D. Cal. 1994) (temporary absence does not defeat homestead claim under state law when debtors return on weekends and holidays, and intend to return full-time after their daughter graduates from high school); In re Eckols, 63 B.R. 523 (Bankr. D.N.H. 1986) (debtor is entitled to homestead exemption under state law even though temporarily absent because ordered out during divorce proceedings, whether he intended to return if awarded custody of the children or had no intent to repossess the property because the parties agreed the property would be sold and debtor would receive his 1/2 interest out of proceeds); In re Smith, 57 B.R. 81, 13 Bankr. Ct. Dec. (CRR) 1290 (Bankr. W.D.N.Y. 1985) (debtor is entitled to a homestead exemption under state law despite absence pursuant to a divorce court order granting occupancy rights to debtor's spouse); In re Brent, 68 B.R. 893 (Bankr. D. Vt. 1987) (abandonment of the homestead must be voluntary and absence under compulsion, whether actual or misunderstood, does not relinquish the homestead; thus, debtor's failure to return, due to an erroneous belief that a court order prohibited it, did not constitute abandonment when debtor otherwise intended to return).
[FN7] See, e.g., In re Lapes, 254 B.R. 501, 45 Collier Bankr. Cas. 2d (MB) 91 (Bankr. S.D. Fla. 2000) (denying debtor's claim of an exemption in a homestead acquired with the creditor's collateral and with the proceeds of fraudulent transfers, granting an equitable lien on the homestead, and ordering its sale).
[FN8] Matter of Asplund, 21 B.R. 139 (Bankr. W.D. Wis. 1982). See also In re Hodes, 287 B.R. 561 (D. Kan. 2002) (permitting debtors to claim a homestead exemption in money deposited with a contractor before the filing of an involuntary petition against debtors, even though nothing had been expended before filing and only a portion of the funds had been expended at the time of entry of the order for relief).

The "debtor's aggregate interest" is also affected by various types of shared ownership. In In re Ryan, 265 B.R. 521 (Bankr. D. R.I. 2001), decision aff'd, 282 B.R. 742, 49 Collier Bankr. Cas. 2d (MB) 140 (D.R.I. 2002), the debtor claimed a homestead exemption in property owned by the entireties with a non-debtor spouse. The court held that, in such cases, the debtor's interest must be valued at 100%, since each owner in a tenancy by the entireties holds all of the property, rather than a separate or divisible share. When the value of the property, so determined, exceeds the allowable homestead exemption, the trustee has something to sell. See also In re Freeman, 259 B.R. 104 (Bankr. D. S.C. 2001) (abrogated on other grounds by, In re Ware, 274 B.R. 206, 47 Collier Bankr. Cas. 2d (MB) 1489 (Bankr. D. S.C. 2001)); In re Patenaude, 259 B.R. 481, 45 Collier Bankr. Cas. 2d (MB) 1487 (Bankr. D. Mass. 2001).

In In re Abernathy, 259 B.R. 330, 45 Collier Bankr. Cas. 2d (MB) 1099 (B.A.P. 8th Cir. 2001), aff'd, 19 Fed. Appx. 460 (8th Cir. 2001), the bankruptcy court held that debtor could claim a homestead exemption, under state law, in only one-third of the value of property she owned jointly with her two sisters. The appellate panel reversed, finding that the state statute clearly allowed one owner to claim the entire exemption as long as no other owner has made a claim. The panel distinguished circuit precedents in which one spouse has filed for bankruptcy and attempted to protect the nonfiling spouse's share of entireties property from the reach of joint creditors, on the grounds that there are significant distinctions between entireties and joint tenancies. The Eighth Circuit affirmed, relying on the panel's decision. See also In re Cunningham, 276 B.R. 314 (Bankr. D. Mass. 2002) (permitting debtor, who owned a two-thirds interest in a three-family home, to claim an exemption in the entire property); In re Brizida, 276 B.R. 316 (Bankr. D. Mass. 2002) (permitting debtors to claim an exemption in an entire three-family house).
[FN9] A few states—notably Texas and Florida—permit debtors to claim homestead exemptions in unlimited amounts, although both have acreage limitations. These provisions have generated a great deal of controversy and litigation, as might be expected. In Texas, which has different acreage limitations for urban and rural land, characterization of a homestead as rural depends upon the lack of urban amenities. In re Bouchie, 324 F.3d 780 (5th Cir. 2003).

Debtors in In re Webb, 263 B.R. 788 (Bankr. W.D. Tex. 2001), argued that the Texas homestead exemption extended to three noncontiguous parcels, each containing a rental house, when those parcels, plus debtors' residential parcel, did not exceed the 200-acre limitation for rural land. The court held that use of the parcels as residences permanently rented to unrelated persons was insufficient to bring the parcels within the homestead exemption, even though the rental income added to the support of debtors' family.

In another case involving contiguous parcels, In re Perry, 345 F.3d 303, Bankr. L. Rep. (CCH) P 78909 (5th Cir. 2003), debtor owned and operated a 26-acre parcel as a mobile home park. He lived on 1.34 acres behind the park office, and also owned an adjoining 59-acre tract. He sought to exempt all of the land as a rural homestead. The bankruptcy court held that he could only claim the 1.34-acre portion; the 59-acre tract was insufficiently related to the 1.34-acre portion, and a homestead in the 26-acre tract had been waived by debtor's operation of a business on the property. The district court reversed, but the Fifth Circuit held that it was not in a position to determine whether debtor, by operating the business, had not abandoned the 26-acre parcel. The case was remanded for determination of that issue.

While a residence is exempt in Florida without regard to value, the exemption does not cover a detached guesthouse that is rented out seasonally. The court in In re Klein, 272 B.R. 807 (Bankr. M.D. Fla. 2002), had to determine the value of such property. In that case, the real property, including both the house and the guesthouse, had an appraised value of $142,000 and was encumbered by a mortgage of $88,012. The guesthouse, alone, was appraised at $22,077, and debtors, in their tax returns, had allocated one-third of the mortgage interest payments to the guesthouse. Following that approach, the court found that one-third of the mortgage—or $29,308—was the encumbrance against the guesthouse. That gave the guesthouse a negative equity of $7,230 ($22,077 minus $29,308), and debtors were not required to pay the trustee anything in order to retain it.

In In re McLachlan, 266 B.R. 220 (Bankr. M.D. Fla. 2001), the trustee objected to debtor's claim of a homestead that included income-producing property. Several years before filing bankruptcy, debtor purchased a parcel, contiguous to his homestead, that had a palm grove from which he occasionally sold trees. Both parcels were outside a municipality and they met the geographic limits for homesteads in such areas. The court held that debtors are allowed a broad occupancy, as long as their use is consistent with a rural setting, and that no authority supports an objection based on a debtor's income-producing activity. Thus, the court denied the trustee's objection to the homestead claim.

The potentially large amounts that can be retained by debtors, through the device of these homestead exemptions, have led to some questionable conduct by debtors. This conduct can only be encouraged by holdings, such as In re Lowery, 262 B.R. 875 (Bankr. M.D. Fla. 2001), to the effect that there is no "fraudulent conveyance" exception to the homestead exemption. Thus, the debtor was able to augment the value of the homestead exemption by converting assets with an intent to hinder creditors.

Another example of questionable behavior by a debtor, this time unsuccessful, is found in In re Bosonetto, 271 B.R. 403 (Bankr. M.D. Fla. 2001). In that case, debtor sold her home and placed all her assets in a living trust after a tort suit was filed against her. When the tort plaintiff obtained a judgment, debtor appealed and, simultaneously, moved to Florida and used all the trust assets to buy a house, titled in joint name with her daughter. She then lost the appeal in the tort case, filed bankruptcy, and claimed an exemption in her home. The trustee sought to avoid the transfer of property as a fraudulent conveyance and objected to the claimed exemption. The court ruled for the trustee. Because the money used to buy the house had come from the trust, the house was owned either by the trust or by a resulting trust, but the Florida homestead exemption is only available to a natural person.

A particularly interesting course of conduct is found in In re John Richards Homes Bldg. Co., L.L.C., 291 B.R. 727, 41 Bankr. Ct. Dec. (CRR) 60 (Bankr. E.D. Mich. 2003), aff'd, 2004 WL 1799774 (E.D. Mich. 2004). In that case, the purchaser of a luxury home, Adell, became embroiled in a construction dispute with the home's builder, JRH, and eventually filed an involuntary bankruptcy petition against JRH. The court found, on the basis of "overwhelming" evidence, that the petition had been filed in bad faith. Damages in excess of 6 million dollars were awarded against Adell under § 303(i). Adell then liquidated his assets in Michigan and bought a house in Florida; he claimed the protection of the homestead exemption when JRH sought the court's assistance in collecting on his judgment. The bankruptcy court held that Florida law is preempted by § 303(i). In addition, the court held that Adell did not meet Florida's residency requirements because he lacked actual intent to live in Florida permanently. Therefore, he was not entitled to claim the Florida exemption. The court granted JRH the relief sought. In re John Richards Homes Bldg. Co., L.L.C., 298 B.R. 591 (Bankr. E.D. Mich. 2003).
[FN10] In In re Quraeshi, 289 B.R. 240 (S.D. Fla. 2002), debtor was entitled to an exemption of one-half acre of land, which constituted 19% of the total acreage. The property was sold for $760,400, and liens and closing costs of $543,500 were paid. The bankruptcy court then awarded debtor a homestead exemption of 19% of the remaining $216,900 ($41,211), essentially concluding that the mortgage should be paid out of the entire proceeds of the sale, rather than out of the nonexempt portion of the proceeds. Debtor argued that he was entitled to 19% of the gross sales price ($144,476), rather than the net price, but the court disagreed. The state homestead exemption specifically excludes certain debts, such as mortgages, so only proceeds net of such liens qualify as a "homestead." Debtor's approach would require calculation of the exempt amount based on assets that are not shielded by the homestead exemption, and would shift the cost of paying those homestead-excluded debts from debtors to the bankruptcy estate. That approach, according to the court, is inconsistent with the statute's plain language.
[FN11] In Matter of Szekely, 936 F.2d 897, 24 Collier Bankr. Cas. 2d (MB) 2028, Bankr. L. Rep. (CCH) 74070 (7th Cir. 1991), Chapter 7 debtors continued living in their house for ten months after bankruptcy was filed. The house was sold for $30,000 more than the sum of two outstanding mortgages, which was enough to cover the debtors' $15,000 homestead exemption in full. The trustee, however, sought to deduct $4,800 in rent for the period of the debtors' postpetition occupancy from the homestead exemption. The court rejected this novel effort because the hardship to the debtors outweighed the trustee's interest in recovering the use value of estate property. Accord, In re Rolfes, 307 B.R. 59 (Bankr. E.D. Tenn. 2004) (applying state law).
[FN12] 11 USC § 554.
[FN13] 11 USC § 522(c)(2).

See In re Karrer, 183 B.R. 177 (Bankr. N.D. Iowa 1994) (judgment liens do not attach to the debtor's homestead as a matter of state law and, because fraud is not listed under § 522(c), the homestead cannot be reached after bankruptcy by the lienholder whose debt was excepted from discharge on the grounds of fraud).
[FN14] Compare In re Delson, 247 B.R. 873 (Bankr. S.D. Fla. 2000) (proceeds of sale of homestead did not retain exempt status, when they were used to purchase collateral for a business loan and a new homestead was never purchased), and Matter of Healy, 100 B.R. 443 (Bankr. W.D. Wis. 1989) (debtors may not claim exemption in proceeds unless proceeds were to be reinvested in a residence debtors intended to occupy), with In re Donaldson, 156 B.R. 51, Bankr. L. Rep. (CCH) 75371 (Bankr. N.D. Cal. 1993), order aff'd, 1994 WL 6903 (N.D. Cal. 1994), order aff'd, 1994 WL 6903 (N.D. Cal. 1994) (debtors may claim exemption in proceeds of sale of homestead even though title was subject to dispute arising from unlitigated claim of defective prepetition foreclosure); In re Barrett, 104 B.R. 688 (Bankr. E.D. Pa. 1989), order vacated on other grounds, 111 B.R. 78 (E.D. Pa. 1990) (debtor may claim exemption in proceeds of sheriff's sale of homestead under § 522(d)(1)); and In re Linderman, 20 B.R. 826 (Bankr. W.D. Wash. 1982) (debtors may claim exemption in proceeds in excess of amount subject to equitable lien in favor of debtors' solely owned corporation for debtors' mortgage payment made by corporation). See also In re Blair, 125 B.R. 303, Bankr. L. Rep. (CCH) 73868 (Bankr. D.N.M. 1991) (denying exemption under state law in proceeds of voluntary prepetition sale of homestead because proceeds had been voluntarily paid to a creditor, citing§ 522(g)).

Cf. In re Lowder, 188 B.R. 573 (Bankr. C.D. Ill. 1995) (state statute providing exemption in proceeds of conveyance of a homestead applies only to proceeds received upon sale and not to loan proceeds used in part to pay off the mortgage on the residence).

Texas law requires, in order to preserve the proceeds of an exempt homestead, that those proceeds be reinvested in a Texas home within six months. In In re Zibman, 268 F.3d 298, Bankr. L. Rep. (CCH) P 78522 (5th Cir. 2001), debtors sold their home in Texas and moved to another state, where they leased a house. Although they did not plan to buy another Texas homestead within the statutory period, the bankruptcy and district courts held the proceeds exempt because the six-month period was in effect at the time debtors filed their bankruptcy petition. The Fifth Circuit reversed, finding that the lower courts improperly permitted debtors to improve their prepetition exemption by expurgating the six-month clock.
[FN15] See 11 USC § 522(d)(11).
[FN16] Compare In re Raymond, 987 F.2d 675, Bankr. L. Rep. (CCH) 75179 (10th Cir. 1993); Orange Brevard Plumbing & Heating Co. v. La Croix, 137 So. 2d 201 (Fla. 1962) (permitting the exemption), with Obenshain v. Obenshain, 252 Ark. 701, 480 S.W.2d 567 (1972) (denying the exemption in proceeds of forced sale because debtor did not intend to invest proceeds in another homestead, and stating in dicta that proceeds of a voluntary sale of a homestead are not exempt).
[FN17] The court in Matter of Healy, 100 B.R. 443 (Bankr. W.D. Wis. 1989), denied an exemption in proceeds because the debtors failed to establish an intent to reinvest the proceeds in another homestead. The court also suggested that the exemption would be denied anyway because § 522(d)(1) makes no reference to proceeds and none can be inferred.
[FN18] Payne v. Wood, 775 F.2d 202, 13 Bankr. Ct. Dec. (CRR) 991, 13 Collier Bankr. Cas. 2d (MB) 1047, Bankr. L. Rep. (CCH) 70808 (7th Cir. 1985).

Bankruptcy Florida Homestead Services - Florida Homestead Exemption Act Forum / Bankruptcy /
Norton Bankruptcy Law and Practice 2d
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