When is a Homestead Exemption Not a Homestead Exemption?

Florida truly believes that a “man’s home is his castle”. This is even true when it comes to filing for bankruptcy. Florida has a homestead exemption which basically states that even though you owe money and you are trying to arrange to have debts discharged through a bankruptcy petition, your home may NOT be looked at as an asset which can be taken from you to help pay those debts. So….your condo, your co-op, your house, your exquisite mansion…are all safe from the bankruptcy trustees. Or are they? There are exceptions to the rule, but, then again, aren’t there exceptions to just about everything in life?

The exception under scrutiny here is 11 U.S.C. 522(o). It would be wise to acquaint yourself with its provisions so that everything involving your bankruptcy petition stays above board. Your homestead may very well be your largest asset and if a trustee can access same for use in paying off creditors, then it is incumbent upon you to prove that this trustee really has no right to claim your homestead.

Under the provisions of this ruling if your home was acquired with non-exempt funds AND there was a fraudulent attempt to defraud a potential creditor then you are out of luck with that homestead exemption. NOW….what actually constitutes a “fraudulent attempt” to avoid your creditors?

Bankruptcy trustees/creditors are allowed to review your buying practices for as far back as TEN years. Where you got that money to buy your home will come to light. Did you use savings? A 401K? What were all the circumstances surrounding the existence and dispersal of this money?

Bankruptcy courts/trustees will pare their examination down to one basic question: what were your expectations when you used money to purchase your home or pay down your mortgage on the home you are claiming as exempt and was there any hint of fraud? Congress has given no guidance to the Courts when it comes to answering this question. Therefore, accepted and historical definitions/applications of “fraud” are used by the bankruptcy courts. These accepted/historical definitions/applications can include but are not limited to the following:

  • Was the homestead transferred to someone considered an “insider”?
  • Did the debtor maintain control of the home even after a transfer?
  • Was the debtor involved in any sort of lawsuit at the time of transfer?
  • Was the home transferred after a large judgment was entered against the debtor?
  • Did the transfer comprise just about ALL of a debtor’s assets?
  • Did the debtor try to leave a court’s jurisdiction?
  • Did the debtor remove or conceal ANY assets?
  • Was the timing of the transfer of a homestead asset coincidental to a bankruptcy filing?
  • Did the debtor obtain credit to buy the homestead?
  • Is there extrinsic evidence of fraud other than those items listed above (Clark v. Wilmoth, 397 B.R. 915)

Any combination of “yes” answers to any of the above questions (again, not an all inclusive list) will raise red flags.

These issues should always be discussed with the professional to whom you are turning for bankruptcy guidance. Don’t dive into the pool unless you are certain that you can swim!

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