Proceeds from the prepetition sale of a homestead may be exempt under state law, but they’re not under federal exemptions, for reasons explained by the Sixth Circuit Bankruptcy Appellate Panel in affirming the bankruptcy court.
A woman sold her home six days before filing a chapter 7 petition. She put the net proceeds, some $36,800, into an escrow account held by her attorney.
The debtor disclosed the sale in her schedules and gave the trustee a copy of the escrow ledger. She elected federal exemptions and claimed that $23,300 of proceeds held in escrow at filing were exempt under Section 522(d)(1).
Sustaining the trustee’s objection to the claim of exemption, Bankruptcy Judge Charles R. Merrill of Louisville, Ky., ruled that the federal homestead exemption did not cover proceeds. In re Richards, 21-40438, 2022 BL 8676, 2022 WL 99503 (Bankr. W.D. Ky. Jan. 10, 2022). To read ABI’s report, click here.
The debtor appealed while amending her exemptions to claim that a portion of the proceeds were exempt under the so-called wildcard exemption.
Bankruptcy Judge John P. Gustafson affirmed in an opinion on August 25.
Judge Gustafson began from the principle that exemptions are to be construed liberally in favor of the debtor. He said that proceeds from a homestead are exempt under Kentucky law but quoted the Collier treatise for saying that “‘section 522(d)(1) does not expressly exempt proceeds from the prepetition sale of homestead property.’”
Section 522(d)(1) provides for a federal exemption of about $25,000 “in real property or personal property that the debtor or a dependent of the debtor uses as a residence . . . .”
In explicating Section 522(d)(1), the debtor urged the BAP to inform the decision by reference to state law, where courts in Kentucky exempt proceeds from the sale of a homestead if they are traceable. Bluntly, Judge Gustafson said that “Kentucky law is inapplicable under these facts.”
Focusing on the language of the statute, Judge Gustafson said that the proceeds could not retain exempt status “because, at the time of filing, there was no property being used as a residence to claim as exempt.”
Judge Gustafson alluded to decisions taking a broader view of the word “uses” by not requiring the debtor to have actually resided in the residence on the filing date. Still, those cases require the debtor to show an intent to occupy the home within a reasonable time.
In the case on appeal, Judge Gustafson said that the debtor had no ability to occupy the home in the future because it had been sold.
Judge Gustafson saw no occasion to employ equity in favor of the debtor because the Bankruptcy Code gives an extra exemption of $13,950 to individuals who are not homeowners.
Affirming the bankruptcy court and denial of the exemption, Judge Gustafson held that “the language of §522(d)(1) does not permit Debtor to exempt the proceeds from prepetition sale of her former residence.”
Proceeds from the prepetition sale of a homestead may be exempt under state law, but they’re not under federal exemptions, for reasons explained by the Sixth Circuit Bankruptcy Appellate Panel in affirming the bankruptcy court.
A woman sold her home six days before filing a chapter 7 petition. She put the net proceeds, some $36,800, into an escrow account held by her attorney.
The debtor disclosed the sale in her schedules and gave the trustee a copy of the escrow ledger. She elected federal exemptions and claimed that $23,300 of proceeds held in escrow at filing were exempt under Section 522(d)(1).
Sustaining the trustee’s objection to the claim of exemption, Bankruptcy Judge Charles R. Merrill of Louisville, Ky., ruled that the federal homestead exemption did not cover proceeds. In re Richards, 21-40438, 2022 BL 8676, 2022 WL 99503 (Bankr. W.D. Ky. Jan. 10, 2022).