Paul, Jr. v. Allred – Asserting Homestead Exemption in L.A. Bankruptcy
In most Los Angeles bankruptcy filings‚ debtors are going to wish to assert a homestead exemption. This is the exemption that will allow you to keep the home in which you live‚ even though other property may be liquidated to satisfy your unsecured debts to various creditors.
Homestead exemptions protect the equity you have in your home‚ and can work in either a Chapter 7 or a Chapter 13 filing. The specifics vary from state-to-state. In California‚ you have the option of choosing between a System 1 determination and a System 2 determination for homestead exemptions.
In a System 1 determination‚ homeowners who are single and not disabled can exempt a maximum of $75‚000 of equity in their home. Up to $100‚000 can be exempted if you live with a family member. The exemption amount goes up to $175‚000 if you are over the age of 65‚ or physically or mentally disabled‚ or are 55 and older‚ single and earn under $15‚000 a year or married earning less than $20‚000 and creditors are trying to force you to sell your home. Even if you are separated‚ you can claim homestead in the community property in which your spouse is currently living.
This system pertains to a property where you actually reside‚ and can also include proceeds from the forced sale of your home six months prior to your filling.
Under System 2‚ you can exempt up to $26‚000 of home equity. This system applies to property that you or one of your dependents uses as a residence. It could be a cooperative and may also include yours or a dependent’s burial plot.
California doesn’t permit bankruptcy filers to use the federal bankruptcy exemptions‚ so these are essentially your two options.
While the overall intention of a homestead exemption is to assure you are not going to be homeless after your bankruptcy has been discharged‚ you should know that the bankruptcy trustee in your case (and possibly your creditors) could object to your homestead exemption or the amount of it.
The case of Paul‚ Jr. v. Allred‚ recently reviewed by the U.S. Court of Appeals for the Eighth Circuit‚ is a good example.
This was a case in which a man voluntarily filed a petition for Chapter 7 bankruptcy relief‚ listing a residential property that he claimed as exempt from the bankruptcy estate under the state’s homestead exemption.
The following month‚ the trustee held a meeting with several of the creditors (called a “341 meeting”)‚ wherein the debtor testified that he had purchased the property many years ago‚ but had moved out of it some 14 years ago. Since that time‚ he had rented out the property. He also testified that he did not intend to move back into the home.
Soon after that meeting‚ the trustee formally filed an objection to the homestead exemption for that property‚ stating that the debtor didn’t live there and didn’t intend to live there at any point in the near future. At the time‚ the debtor did not challenge this statement‚ though he did argue that the exemption was mandated regardless of his intention.
The bankruptcy court considered the trustee’s request for a motion of summary judgement‚ and this was ultimately granted based on the court’s reasoning that the debtor didn’t live there and had no intent to do so.
The debtor appealed this ruling‚ rephrasing his legal arguments‚ but again‚ not disputing the fact that he didn’t intend to move back into the home. The bankruptcy appellate panel upheld the earlier ruling‚ and the debtor then appealed to the Eighth Circuit.
However‚ the appellate court found that just because a person owns a home does not mean he or she has the right to characterize it as a homestead property in bankruptcy proceedings. Specifically‚ the purpose of the homestead exemption is to preserve the right of occupancy‚ and when that need for protection for the family ends‚ there is no longer a reason for the court to protect the property through the homestead exemption.
It is best to have a good understanding – before you file – of which exemptions you are likely to be granted and which you are not. An experienced attorney can help.
If you are contemplating bankruptcy in San Fernando Valley‚ contact Nader‚ Naraghi & Woodcock‚ APLC to schedule your free consultation. Call (800) 568-0707.
Paul‚ Jr. v. Allred‚ Jan. 13‚ 2014‚ U.S. Court of Appeals for the Eighth Circuit