Keeping Your Homestead Exemption in Bankruptcy
When a court interprets a statute to apply the law to a set of facts, it first looks at the “plain meaning” of the statute. The United States Supreme Court discussed the plain meaning rule in Caminetti v. United States, 242 U.S. 470 (1917), reasoning “[i]t is elementary that the meaning of a statute must, in the first instance, be sought in the language in which the act is framed, and if that is plain… the sole function of the courts is to enforce it according to its terms.”
The plain meaning rule often plays an important part in exemption issues during bankruptcy. The bankruptcy court will examine the statute and apply it to the facts of the case. How the court interprets both the statute and the facts of the case can mean the difference between protecting and losing property during a bankruptcy case.
For instance, James and Glory Demeter had maintained their principal residence at a home in Riverview, Michigan, since 1972. In fact, they occupied the home when they filed Chapter 7 bankruptcy in 2012. But they also owned a second home in Cheboygan purchased in 1996. The Demeters lived in Riverview half the year and Cheboygan half the year, and they planned to ultimately live in Cheboygan full time. Consequently, the Cheboygan property was never rented out, never winterized, and was used on winter holidays including Christmas and New Year.
A Michigan bankruptcy court allowed the Demeters to apply their homestead exemption under Section 522(d)(1) of the Bankruptcy Code to protect the Cheboygan property. The court pointed out that this section is not limited to the debtor’s primary or principal residence (whatever those terms mean, since they are not defined by the Bankruptcy Code). The court said that a bankruptcy debtor can apply the homestead exemption to any property that the debtor uses as a residence, even if his principal residence is elsewhere. See In re Demeter, 478 B.R. 281 (Bankr. E.D. Mich. 2012).
Likewise, in the case of Condit v. McKeithan, Case No. 11-41305 (5th Cir. 2012), a debtor was allowed to claim a homestead exemption on property she owned in Texas, but had not resided in for nine years! The debtor had lived with her daughter in Louisiana due to a medical condition, but never abandoned the property in question and consistently stated her intention to return when her health would permit. The debtor maintained the property, paid the taxes and insurance, and kept utilities. She even had an active land-line telephone at the property. However, the debtor used her daughter’s address for mail and on her driver’s license.
Once a property has acquired the status of a homestead, this status typically continues until an abandonment occurs, which depends largely upon the intent of the debtor/claimant and upon the facts of the case (and how the court interprets the homestead statute). The 5th Circuit Court of Appeals stated in Condit v. McKeithan that abandonment of a homestead requires both cessation of use of the property as the debtor’s homestead coupled with an intent to permanently abandon the property as a homestead. The appellate court said that the evidence did not indicate any intent to permanently abandon the homestead.
Placing property on the market with an intent to sell may also put the debtor’s homestead exemption at risk. By evidencing no intent to remain in the home, the debtor may abandon his homestead exemption under certain state laws. See Carpenter v. Brown, 13-CV-61183-KMM (SD Fla. 2013)(signing contract for sale before bankruptcy abandons homestead exemption, even though debtor still lived in property). In some cases the debtor’s intent to reinvest proceeds from the sale of a home into another homestead (within a reasonable time) may be sufficient to protect the homestead exemption. See Orange Brevard Plumbing & Heating Co. v. La Croix, 137 So. 201 (Fla. 1962).