HOMESTEAD EXEMPTION LIMITED BY SECTION 522(P)

Section 522 contains the Federal exemptions for bankruptcy. Not all states have the same amount of homestead exemptions. So, some debtors may engage in bankruptcy forum shopping where they move to the state with the most generous homestead exemption just before filing for bankruptcy relief. For instance, the homestead exemption for California for a debtor with at least one family member living with him and below 65 years old is $100,000. But in Massachusetts, the homestead exemption is $500,000 if you are below 62 years old, and the exemption increases to $1.0 million if you are at least 62. In California, it only increases to $175,000 if you are at least 65 years old. So, what if you are at least 62 years old with a homestead in California with equity of $500,000 and decide that you are going to sell your house in California, move to Massachusetts, use the $500,000 from the sale proceeds of you California house to fully pay for a house in Massachusetts, then file for Chapter 7 bankruptcy relief in Massachusetts, to discharge $200,000 of credit card debt and $150,000 from a second trust deed on a rental property in Arizona that got foreclosed last year. This looks like a smart plan if it works because you would be able to protect the entire $500,000 of equity in your house in Massachusetts when you could have protected only $175,000 of equity in your house in California. BUT IT WON’T WORK because Section 522(P) of the bankruptcy code limits the homestead exemption claim to $146,450 if you acquired the property within 1,215 days before the date you filed for bankruptcy!

 Section 522(P) states “…a debtor may not exempt any amount of interest that was acquired by the debtor during the 1215 – day period preceding the date of the filing of the petition that exceeds in the aggregate $136,875 (currently adjusted to $146,450) in value in: (A) real or personal property that the debtor or a dependent of the debtor uses as a residence; ( B) a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence;…or ( D) real or personal property that the debtor or dependent of the debtor claims as a homestead.”

In Re Tague, the debtor and his wife purchased their home in 1998 as tenants by the entirety. In 2008, the debtor left the country to pursue an investment opportunity in Costa Rica. Prior to his departure, he recorded a declaration of homestead on the property and executed a deed of his interest in the property to his wife. The deed named only the debtor as the grantor. Upon his return to the United States in 2010, the debtor’s wife executed a deed transferring the property to both the debtor and herself as tenants by the entirety. At the same time, the debtor and his wife recorded a new joint declaration of homestead pursuant to the Elderly Homestead Statute. The debtor filed for Chapter 7 relief three months later. He claimed an exemption in the property in the amount of $500,000. The trustee objected that the debtor’s homestead exemption was limited by Section 522(p) to $146,450. Who is correct, debtor or trustee?

 The bankruptcy court sustained the trustee’s objection and agreed that the trustee was correct. (Looks like debtor’s wife should not have transferred title to both debtor and herself when debtor returned to the United States. That turned out to be a big mistake. If title remained in her name only, the house would not have been affected by her husband’s bankruptcy!) “The facts warranting the application of Section 522(p)’s homestead cap are straightforward and admitted: the debtor had a tenancy by the entirety interest in the property, which he conveyed to (his wife) by the 2008 deed, leaving him with no interest in the property until she executed the 2010 deed re-conveying it to both of them as tenants by the entirety less than 100 days prior to the filing of his petition…” the court said. Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years. He specializes in bankruptcy, business and civil litigation and has handled more than four thousand successful bankruptcy cases in California. He speaks Mandarin and Fujien and looks forward to discussing your case with you personally. Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.