Debtor Who Acquired Ownership Interest in Home within 1,215 Days of Petition Date is Subject to Homestead Exemption Cap under §522(p)

Debtor Who Acquired Ownership Interest in Home within 1,215 Days of Petition Date is Subject to Homestead Exemption Cap under §522(p)

The chapter 7 trustee in this case, has filed an objection to the exemption
in real property claimed by the Debtor requesting that the amount of the exemption be limited either to $125,000, the so-called automatic homestead exemption under state law, or $160,375, based on the maximum exemption allowable under the Bankruptcy Code for property interests acquired by a debtor during the 1,215 day period (that’s about three years and four months) preceding the filing of his bankruptcy petition. The Debtor disagrees with his trustee, claiming an exemption in the property under the state Homestead Act in the amount of $276,205 based on his recorded declaration of homestead and adds suspenders to his belt by relying on his wife’s declaration of homestead recorded after he filed his bankruptcy petition.

In July of 1999, the Debtor and his wife transferred title to their homestead to the Family Trust which was formed under a Declaration of Trust dated July 2, 1999, and recorded at the  County Registry of Deeds on July 30, 1999. Since its formation, the Debtor has served as the trustee of the trust and two children have been its beneficiaries. In December of 2013, the trust transferred title to the  to the Debtor and his wife as tenants by the entirety.

On October 17, 2016, the Debtor initiated this bankruptcy case by filing a voluntary petition for relief under chapter 7 of the Bankruptcy Code. On schedule A/B of the schedules of assets and liabilities accompanying his petition, he listed an ownership interest as a joint tenant in the  property. On schedule C, the Debtor claimed a homestead exemption in the  property pursuant to the  Homestead Act in the amount of $276,205.

The Trustee filed his objection to the Debtor’s homestead exemption claim on January 17, 2017. On February 24, 2017, the Debtor’s wife recorded her own declaration of homestead with respect to the  property in the County Registry of Deeds. She used the correct form. Like the Debtor, she declared herself entitled to the benefits accorded to elderly or disabled individuals.

It is the Trustee’s position that because the October 2016 declaration of homestead recorded by the Debtor was executed by him as trustee of the Family Trust for the benefit of the named beneficiaries of that trust, when in fact the property was not owned by the trust, the declaration is a nullity. The trustee also points to the requirement in the Homestead Act which provides that where a home is co-owned by a married couple and both occupy the premises as their principal residence, both spouses must execute the homestead declaration, and notes that here the October 2016 declaration of homestead was not signed by the Debtor’s wife. As to his wife’s separate homestead declaration, the Trustee points out it was filed after commencement of this bankruptcy case and should have no force as to his rights as a bankruptcy trustee or the rights of the Debtor’s creditors. Because as of the date of the bankruptcy filing, no valid declaration of homestead was of record with respect to the property, the Trustee asserts that the Debtor’s homestead rights are limited to the automatic exemption of $125,000 under State Law.

As a fallback, the Trustee maintains that even if the Debtor’s homestead declaration is held to be valid, because he acquired his ownership interest in the property from the trust within 1,215 days of his bankruptcy filing, Bankruptcy Code §522(p)(1) would limit his homestead exemption to a maximum of $160,375.

The Debtor sees things differently. He claims that his exemption is not subject to the § 522(p)(1) cap since he has resided, along with his wife, in the property for more than 30 years and the transfers of title to and from the Family Trust did not interrupt the continuity of their ownership. But his trump card is his wife’s post-bankruptcy petition recording of her own declaration of homestead, which he claims as a practical matter neutralizes any of the objections raised by the Trustee.

In working through the parties’ arguments it is helpful to outline the relevant statutory framework and set out some guiding legal principles. Under § 522(b) of the Bankruptcy Code, a debtor may elect to exempt property of the estate either under federal bankruptcy law or under state law or non-bankruptcy federal law. The Debtor has claimed his exemptions, including his homestead exemption, under state law.

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