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Property exemptions are a complicated, but critically important, aspect of bankruptcy law that incorporate both federal and state law. California has two systems of exemptions that apply to bankruptcy cases, known as System 1 and System 2. System 1 allows for higher exemptions for assets like a homestead property, so it may appeal to people who have a large amount of equity in their home. This system draws directly from provisions in California’s Code of Civil Procedure pertaining to the enforcement of money judgments. If only one spouse files for bankruptcy, the question arises of how much of the exemption the debtor spouse may claim. California statutes and federal case law offer an idea of how one spouse may claim the full homestead exemption.

California is a community property state, meaning that most property acquired by a married couple during their marriage belongs to the marital estate, with each spouse owning an undivided half. Some spouses prefer to hold title to their homestead property as tenants in common, in which each spouse may own different percentages. State law defines “homestead” as the principal residence of a judgment debtor, or the debtor’s spouse, on the date that a judgment creditor’s lien attached to the property, provided that the debtor or the debtor’s spouse continually lived there from that date until the date a court rules that the property is a homestead. The homestead exemption may also apply to proceeds from the sale of a qualifying residence, or insurance proceeds from the destruction of such property, if the debtor uses those proceeds to purchase a new primary residence within six months.

The amount of the California homestead exemption available to each spouse depends on whether they hold title to the property as tenants in common as community property. For families with only one homestead, the exemption amount is currently $100,000. If only one spouse files for bankruptcy, that spouse may claim half of the exemption amount if the homestead is community property, or may claim the entire exemption if the spouses own it as tenants in common. Continue reading

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The trustee in a Chapter 7 proceeding has authority to recover property belonging to the bankruptcy estate from the debtor or another person or entity, even if they did not have “possession, custody, or control” of the property at the time the trustee sought recovery, according to the Ninth Circuit Court of Appeals in Shapiro v. Henson, 739 F.3d 1198 (9th Cir. 2014). Both the bankruptcy court and the district court denied the trustee’s turnover motion on the grounds that the debtor did not have “possession, custody, or control” of the property at the time the trustee filed the motion. The appellate court held that the trustee may seek turnover from anyone who had “possession, custody, or control” at any point during the bankruptcy case. This could expand a trustee’s power considerably and place additional obligations on debtors.

The debtor filed for Chapter 7 bankruptcy in August 2009. At that time, she had a checking account at Bank of America with a balance of almost $7,000. She had written several checks before filing the petition, which the bank did not honor until after she filed. The court-appointed trustee requested turnover of the funds in the account in October 2009, on the grounds that the funds had become the property of the bankruptcy estate. The debtor refused to comply, claiming that she was no longer in possession of the funds because the bank had honored her pre-petition checks. The trustee filed a turnover motion against the debtor under 11 U.S.C. § 542(a).

The bankruptcy court denied the trustee’s motion. It held that the checks became part of the bankruptcy estate when the petition was filed, but that the trustee could not compel the debtor to turn over the funds under § 542 if she no longer had possession of them. The district court affirmed the bankruptcy court’s order, noting that the trustee could pursue the creditors who received the funds from the checks, and that the trustee could have “double satisfaction” by seeking turnover from both the debtor and the creditors. In re Henson, 449 B.R. 109, 113 (Bankr. D. Nev. 2011). Continue reading

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