Bankruptcy Debtors Might Improperly Claim Homestead Exemptions

This piece originally appeared in the February 2024 edition of MortgagePoint magazine, online now.

When an individual with an ownership interest in their primary residence files a bankruptcy case, their home (amongst other applicable property) becomes a part of the bankruptcy estate. 11 U.S.C.A. § 541(a). A bankruptcy debtor may be able to protect their residence and obtain some protection from creditors by claiming a homestead exemption, which is either a federal exemption or, if a state has enacted its own law, a state exemption. California provides for its own homestead exemption, which defines homestead as a “principal dwelling” where the debtor resided when the lien attached and where the debtor resides when the bankruptcy case is filed. Cal. Civ. Proc. Code §§ 740.730(a)(1), 740.710(c).

Further, California’s homestead exemption requires the exemption to be applicable as of the bankruptcy filing date. Cal. Civ. Proc. Code § 703.140(c).

A case recently decided by the Court of Appeals for the Ninth Circuit, McKee v. Anderson, No. 22-60055 (9th Cir. Jan. 17, 2024), presents an example of a situation in which a debtor claims a homestead exemption to which they are not entitled.

In McKee, an unmarried couple, McKee and her partner, and the partner’s mother bought a lot. A home was eventually built; however, McKee moved out of the home about a year later, in 2016. Several years later, in 2021, due to financial issues, McKee filed a Chapter 7 bankruptcy case. In that case, McKee claimed an $88,250 homestead exemption. The bankruptcy trustee, McKee’s former partner, and her mother filed objections to the exemption claim, which the bankruptcy court sustained. McKee’s appeal was then heard by the Bankruptcy Appellate Panel, which affirmed the bankruptcy court’s decision.

Next, McKee appealed to the Court of Appeals for the Ninth Circuit.

Citing prevailing California case law, the Court of Appeals recognized that a debtor does not have to physically live at the primary residence to meet the homestead exemption statute’s residing requirement (McKee at 6,7). Specifically, the ability to claim the exemption requires a debtor to reside at the property when the case is filed or to intend to return to the property (McKee at 6,7). There was no dispute that McKee did not live at the property when she filed her bankruptcy petition (McKee at 7). Therefore, the core issue was whether she met the alternative requirement of intending to return to the property.

To show that she sufficiently met the intent-to-return requirement, McKee argued that she wanted to return the home, McKee signed a settlement agreement with her former partner that resulted in McKee returning her keys and garage opener. The agreement further provided that the former partner would assume the sole responsibility for paying the mortgage installments, home insurance, and property taxes. Additionally, McKee had removed all her personal belongings from the home and changed the home address on her driver’s license and voter registration to her new condominium address. Finally, McKee had also expressed a desire to cash out her interest in the residence. Based upon the weight of this evidence that involved no access to the property, no belongings on the property, no responsibility related to the property, and wanting to cash out her interest in the property, the Court of Appeals found that McKee failed to meet the burden of proving she qualified for the homestead exemption and affirmed the decisions of the bankruptcy court and Bankruptcy Appellate Panel [McKee at 9-10; Cal. Civ. Proc. Code §§ 703.580(b)].

It may not happen often, but when applicable to the interests of a Creditor as a party in interest, consider objections to the homestead exemptions as an option.

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