Can Debtors Claim a Homestead Exemption in One State if They Bought a House in Another State and Plan to Leave?

Section 522(b)(3)(A) of the Bankruptcy Code generally permits a debtor to claim exemptions under the state or local law applicable on the date of the filing of the petition.[1] Which state or local exemption scheme applies is determined by a debtor’s domicile during the 730 days immediately preceding the petition date, but what happens if you live in two places? In In re Felix,[2] a case that should certainly become a bar exam problem, the Sixth Circuit Bankruptcy Appellate Panel and the bankruptcy court before it recently answered this very question.

The cases begin with a simple premise. Mr. and Mrs. Felix owned two houses: a house in Reynoldsburg, Ohio, they purchased in 2004, and a house in Upper Marlboro, Md., they purchased in 2009.

In 2015, the Felixes filed a chapter 7 petition, and from there, things got more complicated. The Ohio house, which the Felixes valued at about $280,000, did not have a mortgage, but it was purportedly subject to more than $400,000 in tax liens. On their statement of intent, they proposed to retain the Ohio house and surrender the one in Maryland. They also claimed a homestead exemption for the Ohio house under Ohio law. But the pleadings didn’t tell the whole story.

At the 341 meeting of creditors, the Felixes told the trustee they had been commuting between Maryland and Ohio and ultimately planned to move to Maryland. Mrs. Felix noted they did not want to stay in the Ohio house because of the IRS liens. She also stated she had moved to Maryland and was only commuting to Ohio. Their attorney indicated they planned to pursue an offer in compromise with the IRS to deal with the tax liens on the Ohio house and request a modification of the loan on the Maryland house so his clients could move there. At a Rule 2004 exam, Mrs. Felix further expressed her dissatisfaction with Ohio and her job there and that she desired to be closer to her family in Maryland. 

The trustee objected to the Ohio homestead exemption, arguing Ohio was not their domicile prior to their bankruptcy case. Ohio’s exemption statutes permit joint debtors to claim a generous $265,800 homestead exemption. Maryland law, on the other hand, would have permitted the Felixes to exempt only $6,000 in equity in their primary residence.To make matters worse for the Felixes, the parties later discovered that the IRS had recorded its liens in the wrong county, which made the objection to exemption even more worthwhile for the trustee to pursue.

The bankruptcy court took five days of testimony, during which the Felixes drastically changed their tune. Suddenly they were spending all their time in Ohio and only went to Maryland every few months. Their Maryland neighbor testified that she never saw them, and they submitted ample evidence of their ties to Ohio. Ultimately, though, the bankruptcy court ruled in favor of the trustee.

On appeal, the BAP noted that the case presented a mixed question of fact and law. Applying the Supreme Court’s recent decision in U.S. Bank Nat’l Ass’n v. Vill. at Lakeridge LLC,[3] the BAP concluded that a clear-error standard should apply, since the law on domicile is well settled and the bankruptcy court’s opinion was primarily based on its findings of fact. Concluding that the bankruptcy court’s findings were not clearly erroneous, the BAP affirmed.

So why were the Felixes domiciled in Maryland and not Ohio?

Courts have described the difference between residence and domicile in a variety of ways. As the bankruptcy court put it, “[d]omicile is a combination of physical presence, along with the intent to remain permanently in the chosen location.”[4] The BAP noted that domicile “is distinguished from a residence by the permanency and scope of a party’s presence at either location.”[5] Domicile “is the place where a person dwells and which is the center of his domestic, social, and civil life.”[6]

To determine domicile, the BAP looked to the 1941 Supreme Court case of District of Columbia v. Murphy[7] and to In re Felgner,[8] a 2011 bankruptcy court opinion out of the Northern District of Ohio. In Murphy, the Supreme Court ascertained the meaning of the word “domicile” in a District of Columbia tax statute. The bankruptcy court in Felgner identified 10 factors from Murphy that are relevant in determining domicile: (1) the location of the current residence; (2) voting registration and voting practices; (3) location of spouse and family; (4) location of personal or real property; (5) location of brokerage and bank accounts; (6) memberships in churches, clubs, unions and other organizations; (7) location of a person’s physician, lawyer, accountant, dentist and stockbroker; (8) place of employment or business; (9) driver’s license and automobile registration; and (10) payment of taxes.[9]

The record contained plenty of facts that supported both sides. The Felixes’ minor children attended school in Ohio, but their older daughter and Mrs. Felix’s family lived in Maryland. They worked in Ohio, but they were also trying to start a business in Maryland. Their family physicians and churches were in Ohio, but Mrs. Felix had a driver’s license and was registered to vote in Maryland. Routine activities took place in both states.

In the end, it all came down to credibility. Before the Felixes had a reason to want otherwise, they openly admitted their plan to make Maryland their home and leave Ohio. The bankruptcy court found the Felixes’ change of heart unpersuasive and sustained the trustee’s objection. The Felixes’ case is a good lesson for debtors and practitioners everywhere: Home may be where the heart is, but domicile is where you want to stay.

Please contact John Cannizzaro or another member of Ice Miller’s Bankruptcy and Financial Restructuring Practice Group if you have questions about this topic.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.