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Bankruptcy Appellate Panel Applies State Law in Determining Homestead Exemption

tpsdave [Public domain, CC0 1.0 (http://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayThe Bankruptcy Appellate Panel (BAP) for the Ninth Circuit vacated the ruling of a bankruptcy judge, finding that the debtor in a Chapter 7 case might be entitled to exempt certain real property as his homestead. In re Calderon, 507 B.R. 724 (BAP 9th Cir. 2014) (PDF file). The bankruptcy court sustained the trustee’s objection to the debtor’s claimed exemption because the debtor did not live at that property. The federal Bankruptcy Code includes provisions for property exemptions but allows states to apply their own exemptions. In California, for example, state law governs exemptions in all personal bankruptcy cases. The BAP found in Calderon that the laws of the debtor’s state, Arizona, applied to his case, and that Arizona law allows the exemption of a homestead where a debtor does not live under certain circumstances.

The debtor and his wife purchased the residence at issue in 2002. They both lived there until they divorced in March 2011. The debtor became the sole owner of the residence under the terms of their divorce settlement, but he moved out shortly after the divorce was finalized. He moved into a rental house and kept all of his belongings with him there. He leased the residence to a couple with a one-year lease that began on May 1, 2012 and expired April 30, 2013, with an option to renew.

In July 2012, the debtor filed for Chapter 7 bankruptcy. He initially used the rental home as his home address and identified the residence as rental property. In September 2012, he filed an amended Schedule C that claimed a homestead exemption in the residence under Arizona law. A.R.S. § 33-1101(A). He claimed the residence was worth about $300,000 and that he had about $84,000 in equity.

The trustee objected to the homestead exemption, arguing that the debtor could not claim it because he moved out more than a year earlier and was renting it to someone else. The bankruptcy court, as sanctions for failing to comply with a scheduling order, did not allow the debtor to present evidence at the hearing on the objection, so it only considered the trustee’s evidence and testimony. The trustee’s case principally consisted of evidence that the debtor did not live in the residence, but she conceded that the debtor “had expressed a generalized intent to move back” to the residence. Calderon, 507 B.R. at 728. The court held that state law allows a debtor to claim a homestead exemption within two years of moving out, but not when the “intent to return to the Property is vague.” Id.

The BAC examined the statute governing the abandonment of homestead property, A.R.S. § 33-1104. It concluded that the provision declaring that the abandonment of a homestead is “permanent” after two years is not an absolute deadline, but rather “was meant to aid courts in determining the intended permanency of the removal from the residence.” Calderon, 507 B.R. at 731. The exemption may still apply even after two years, the court held, if the debtor shows a “clear intent” to return. Id. at 732. Here, the BAP held that the bankruptcy court applied the wrong legal standard, since the debtor had vacated the residence less than two years before claiming the homestead exemption.

Devin Sawdayi has represented people in the Los Angeles area in Chapter 7 and Chapter 13 bankruptcy cases for more than 18 years. To schedule a free and confidential consultation with a knowledgeable advocate, who can help you rebuild your finances with dignity and respect, contact us today online or at (310) 475-9399.

More Blog Posts:

Supreme Court Rules Bankruptcy Trustee Cannot Use Exempt Assets to Pay Expenses, Even If Caused by Debtor Misconduct, Los Angeles Bankruptcy Lawyer Blawg, May 31, 2014

Exemption of Property in California Bankruptcies, System 2, Los Angeles Bankruptcy Lawyer Blawg, September 20, 2013

Exemption of Property in California Bankruptcies, System 1, Los Angeles Bankruptcy Lawyer Blawg, September 18, 2013

Photo credit: tpsdave [Public domain, CC0 1.0], via Pixabay.