A couple succeeded in doubling their homestead exemption by divorcing after they jointly filed bankruptcy, thanks to an opinion on California law by the Ninth Circuit Bankruptcy Appellate Panel.
The opinion stands for the proposition that a divorcing couple are not stuck with the exemptions they claimed when they filed.
A couple purchased a home almost 10 years before they filed a joint chapter 13 petition. They declared the house to be their homestead when the purchased the property and claimed the homestead exemption in the same property in their petition.
After bankruptcy, the couple divorced; the husband kept the “homestead,” and the former wife purchased a home of her own. The divorced wife severed her case from her husband’s and converted her case to chapter 7, in which she declared the new home to be her homestead. The husband allowed his chapter 13 case to be dismissed.
Over the wife’s chapter 7 trustee’s objection, the bankruptcy court upheld the wife’s exemption of her new home. The trustee then filed a motion to sell the old “homestead” owned and occupied by the former husband.
The wife’s trustee contended that the couple were bound by the homestead exemption they claimed when they filed. The trustee also cited California law for the proposition that a couple can claim a homestead exemption in no more than one property. Since the wife’s exemption in her new home had been upheld, the trustee argued that the (former) husband could claim no exemption in the “old” home.
The trustee’s argument was seemingly buttressed by the Ninth Circuit appellate panel’s 1989 decision in Burman v. Homan (In re Homan), 111 B.R. 356. That case held that a bankrupt spouse’s election to waive a homestead exemption was binding on the non-bankrupt spouse.
Writing the appellate panel’s August 1 opinion, Bankruptcy Judge Randall L. Dunn declined to extend Homan to a divorced couple. He said that “marital status on the petition date is not fossilized for the duration of the case.” The court must determine the former husband’s homestead rights based on his marital status “as of the present, not as of the petition date.”
Since the couple were no longer married, the panel allowed the husband to assert a homestead exemption. The B.A.P. barred the trustee from selling the home unless the price were sufficient to pay the former husband the full amount of his exemption.
The trustee argued that ruling in favor of the husband would enable postpetition exemption planning to augment a couple’s exemptions. Judge Dunn was “disinclined” to rule based on the trustee’s “speculative concern” that the outcome would lead to the “draconian result the trustee seeks.”
California has two forms of homestead exemption, one known as “automatic” and the other called “declared.” The two are not mutually exclusive, but their interrelationships are highly complex. Judge Dunn’s opinion is a textbook exposition of the two statutes, explaining when and how they may apply, and with what results.