Bankruptcy Laws: Page 4

Page   1   2   3   4   5   6   7   8

• 8.  Limits on state specific homestead exemptions, effective date

The noted amendments, limiting the right to claim large homestead exemptions, apply in all cases filed on or after the enactment of S.256. The provisions related thereto are thus retroactive to enactment and not contingent on the October 17, 2005 effective date.

Reduction of homestead value for fraudulent additions

A new § 522(o) reduces the value of a debtor’s homestead, for purposes of a state homestead exemption, to the extent of any addition to the value (which would include renovations, additions or other things which may have been done to increase the value) of the homestead on account of a disposition of nonexempt property made by the debtor — made with the actual intent to hinder, delay, or defraud creditors — during the 10 years prior to the bankruptcy filing. This provision involves converting property and assets for subsequent use to increase the value of a homestead. For example, if a debtor sold several valuable automobiles that were otherwise nonexempt property and used the proceeds to build an addition or undertake home improvements on an existing homestead property. This would have the effect of shielding the value of these prior non-exempt assets insofar as a debtor could presumably increase the value of equity in a particular homestead asset and draw the equity out through a credit line or refinance. This provision prevents this type of activity. This is the fraudulent conveyance aspect of the statute that relates to the conversion of non-exempt assets to exempt assets as part a scheme to defraud creditors. It is unclear on how this will affect the housing market, but the practice of liquidating assets for the purchase of homestead-protected real property is done frequently enough to warrant the change. From an anecdotal standpoint, the practice will typically involve a quickly closed cash deal on residential property, which is rarely negotiated. This may temporarily inflate purchase prices in a specific location, but it is unlikely to have any far reaching market effect. It does, however, factor into the cumulative effect of the new law.

• 9.  Limitation on new homestead valuation additions; homestead caps. Effects on debtors in Florida and other formerly unlimited homestead exemption states

Under a new § 522(p), any value in excess of $125,000 — without regard to the debtor’s intent — that is added to a homestead during the 1,215-day (approximately three years, four months) preceding the bankruptcy filing, may not be included in a state homestead exemption unless the same is the principal residence of a family farmer. It should be noted, however, that the addition of value does not apply in the case of the value being attributed to another (transfer) homestead in the same state. In some states such as Florida, homestead is transferable or portable with respect to transactions involving homestead estates. If a homestead is sold in Florida, the proceeds are protected pending disposition in purchasing another homestead, which upon acquisition accrues the same protection as the previous homestead. The new bankruptcy provisions are primarily aimed at the conversion of non-exempt assets in which a debtor facing a large judgment would place the bulk of their assets into a house, file bankruptcy while claiming the house as exempt property. Notwithstanding the same, it appears as though most determinations as to homestead will require a hearing before the bankruptcy court unless the debtor is willing to stipulate to a limitation of a particular exemption.

Under a new § 522(q), an absolute $125,000 homestead cap applies if either (a) the court determines that the debtor has been convicted of a felony demonstrating that the filing of the case was an abuse of the provision of the Bankruptcy Code, or (b) the debtor owes a debt arising from a violation of federal or state securities laws, fiduciary fraud, racketeering, or crimes or intentional torts that caused serious bodily injury or death “in the preceding 5 years.” However, this limitation is inapplicable if the homestead property is “reasonably necessary for the support of the debtor and any dependent of the debtor.” The limitations noted above apply to individual debtors. Accordingly, a married couple in bankruptcy can still claim up to $250,000 of exempt property notwithstanding any of the other protections provided under some other state or constitutional basis, which provides unlimited protection in the event the caps do not apply. The securities law violations were a result of the recent wave of corporate scandals in which executives sought to shield assets by purchasing expensive homes in unlimited exemption homestead states.

Delay of discharge to determine homestead limits

The discharge provisions of Chapters 7, 11, and 13 are all amended to delay the grant of discharge for a debtor who is subject to a proceeding that might that might give rise to a limitation of the homestead exemption under new § 522(q) (1), discussed above. In Chapter 7, a new ground for not granting discharge is set out in § 727(a) (12), based on a finding by the court that such a § 522(q) proceeding is pending. In Chapter 11, a new § 1141(d) (5) (C) appears to require, as a condition for discharge, that the court find no reason to believe that such a proceeding is pending (the provision is ambiguous because it is a long sentence fragment). Again this delay in the process will presumably create a pending backlog of non-discharged cases tied up with homestead related proceedings. Most underwriting guidelines prevent mortgage approvals during the pendency of bankruptcy proceedings and absent a Notice of Discharge form the court. In Chapter 13, new § 1328 (h) clearly provides that the court may not grant a discharge unless the court finds “no reasonable cause to believe” that there is pending a proceeding of the kind that would result in the limitation of an exemption under § 522(q). All of these new provisions specify that the hearing they allow or require is to be conducted “not more than 10 days before the date of the entry of the order granting discharge.” The intent of these provisions apparently is to allow a discharge order to be entered only if the court is able to find that no § 522(q) proceeding is pending, with the impact of delaying discharge until the conclusion of any such proceeding. The heading of § 330 of S. 256 — “Delay of discharge during Pendency of Certain Proceedings” — confirms this understanding. Creditors would presumably be permitted to file an adversary or contested proceeding under this section.

Page   1   2   3   4   5   6   7   8