Claiming A Bankruptcy Homestead Exemption When You Intend To Sell Your Home

October 26, 2011 by  Filed under: Bankruptcy 

In some states, a debtor’s homestead is exempt from seizure during bankruptcy, even if the home has significant equity. But what happens if a debtor intends to sell their homestead after they file bankruptcy? Let’s take a look at a few of the facts:

What Is A Homestead?

A homestead is the primary residence of the bankruptcy debtor. Any residence where the debtor and their family reside most of the time can be claimed as a homestead in bankruptcy. This excludes business establishments or some mobile type homes. For example, a homeless bankruptcy debtor living in their car or in the backroom of their business would not have the right to claim a homestead exemption on those properties.

Establishing Primary Residence

If a debtor is living at their primary residence when they file bankruptcy, they can claim the homestead exemption on the property. Even if they have the home on the market because they want to sell it, as long as they are currently residing at the home at the time of filing bankruptcy and they reside there for most of the year, they can claim the homestead exemption.

Homestead Controversy

As you may have imagined, there is some controversy surrounding claiming a homestead exemption when you have no intention of remaining in the home. This really is a grey area because some bankruptcy trustees have vehemently opposed the homestead exemptions of debtors who are actively attempting to sell their property. However, bankruptcy courts have consistently sided with the debtor if the debtor was living in the home at the time that they filed bankruptcy.

On the other hand, if the debtor sells their home right after filing bankruptcy, they can expect some challenges. Remember, the bankruptcy trustee wants to get their hands on the cash to repay creditors, so if the debtor did not use the sales proceeds to buy a new home, the bankruptcy trustee may try to seize the cash and revoke the homestead exemption. Also, if the bankruptcy debtor moves out of their home right before filing bankruptcy or right after filing bankruptcy, the bankruptcy trustee may try to challenge the homestead exemption.

If a debtor wants to sell their home during bankruptcy and there is equity in the property, they need to work closely with their bankruptcy attorney to protect any profits. It may be in the best interest of the bankruptcy debtor to wait until after their bankruptcy discharge to sell their home, to avoid any conflict with the trustee. The bankruptcy courts have consistently ruled that the trustee does not automatically have a right to revoke a homestead exemption just because a debtor moved right after their bankruptcy discharge.

Reed Allmand, sponsoring attorney for Bankruptcy.net, is constantly looking for ways to provide the best financial information for his clients. Whether you are considering filing for bankruptcy, or are currently going through a Chapter 7 or Chapter 13, visit http://www.bankruptcy.net for up to date news and information you need to know.

Article Source:
http://EzineArticles.com/?expert=Reed_Allmand

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