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socrateaser
socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 33559
Experience:  Attorney and Real Estate Broker -- Retired (mostly)
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I am underwater by $150K on my Washington State home. I expect

Customer Question

I am underwater by $150K on my Washington State home. I expect to receive a substantial personal injury settlement in the next 2 years. I plan to use the settlement money to buy a new principal residence in Washington State and rent out my current home. If the housing market doesn’t recover in the next few years I may default on the mortgages on the old home. When I am foreclosed upon I will certainly owe a deficiency balance on the large 2nd trust deed. If I file bankruptcy to discharge the 2nd TD deficiency, will I lose my homestead exemption on my new home because, years before the filing, I used non-exempt property (the personal injury settlement) to purchase exempt property (the new home)? Suppose the 2nd TD creditor claims it was a fraudulent transaction and I claim it was an investment decision I made years before filing for bankruptcy in anticipation of a rebound in the housing market. How would the decision be made about the homestead exemption? Would there be a trial? Who would have the burden of proving intent?
Submitted: 3 years ago.
Category: Bankruptcy Law
Expert:  cfortunato replied 3 years ago.

Hi JACustomer,

A debtor is allowed to transfer exempt assets into non-exempt assets. Doing this is not considered to be a fraudulent transfer, which can come about only when assets are transferred to another person.

 

I think this is what you wanted to know. If not, please let me know.

Thank you!

Customer: replied 3 years ago.
What I am concerned about is the application of:

11 U.S.C. 522

(o) For purposes of subsection (b)(3)(A), and notwithstanding subsection (a), the value of an interest in--

(1) real or personal property that the debtor or a dependent of the debtor uses as a residence;

(2) a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence;

(3) a burial plot for the debtor or a dependent of the debtor; or

(4) real or personal property that the debtor or a dependent of the debtor claims as a homestead;

shall be reduced to the extent that such value is attributable to any portion of any property that the debtor disposed of in the 10-year period ending on the date of the filing of the petition with the intent to hinder, delay, or defraud a creditor and that the debtor could not exempt, or that portion that the debtor could not exempt, under subsection (b), if on such date the debtor had held the property so disposed of.

This seems to say that if a court finds that using the proceeds of my settlement to purchase a new principal residence constitutes a disposition of non-exempt property with the intent to hinder, delay, or defraud a creditor,.my homestead exemption would be reduced by the amount of settlement money that I used to purchase the residence. How would the court decide on what my intent was? Who has the burden of proving my intent: me or the creditor?

Thank you.

Expert:  socrateaser replied 3 years ago.
Hi,

Different lawyer here.

Florida precedent for your question is found in Havoco of Am., Ltd. v. Hill, 790 So.2d 1018, 1028 (Fla.2001) (“Havoco I”); Havoco of Am., Ltd. v. Hill, 255 F.3d 1321 (11th Cir.2001) (“Havoco II”):

  • ...a debtor's use of nonexempt funds to purchase homestead with actual intent to hinder, delay, or defraud creditors, even if “blatantly a move designed to deceive ... creditors and one made in bad faith, does not rise to the level of fraud, nor does it constitute egregious behavior” sufficient to render the homestead exemption inapplicable. Chauncey v. Dzikowski (In re Chauncey), 454 F.3d 1292, 1294 (11th Cir.2006) (citing Havoco II ).

Therefore, based upon current case law, you are safe.

Hope this helps.

NOTICE: My goal here is to educate others about the law. I am always available to answer your follow-up questions after you click Accept – however, if you do not click Accept, the website gets paid, and I receive nothing. This is true, even if you are on a subscription plan. So please click Accept, so that I will be able to continue to provide this service for others in the future.

socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 33559
Experience: Attorney and Real Estate Broker -- Retired (mostly)
socrateaser and other Bankruptcy Law Specialists are ready to help you
Customer: replied 3 years ago.
The Havoco case is from 2001, before BAPCPA. Haven't there been any more recent cases? Also would a Florida case set a precedent that a Washington court would have to follow? Again, if a creditor claimed my purchase of a new homestead constituted an attempt to hinder, etc. the creditor, who would have the burden of proof of establishing what my intent was in making the purchase?
Expert:  socrateaser replied 3 years ago.
When I originally read your question and the attorney's answer, I incorrectly assumed that you are located in Florida, because the attorney who answered you is a Florida bankruptcy attorney (that's what her verification states). Also, when I read your original question it did not show your location. So, I answered pursuant to Florida law.

That said, no Washington case has directly confronted this issue, to date -- so, I am constrained to use the precedent that is currently accepted in the 9th Circuit (i.e., the federal circuit wherein Washington State is situated) as controlling:

  • [A] recent Ninth Circuit Bankruptcy Appellate Panel decision explains that even though not per se fraudulent, prebankruptcy transfers of nonexempt assets into exempt assets are also not per se insulated from avoidance. Wolkowitz v. Beverly (In re Beverly), 374 B.R. 221 (9th Cir.BAP2007), aff'd 551 F.3d 1092 (9th Cir.2008).13 Accord Fitzgerald v. Hawkins (In re Hawkins), 91 I.B.C.R. 54, 55 (Bankr.D.Idaho 1991) (“While the fact that [debtors] may have availed themselves of the annuity contract exemption on the eve of the filing of their bankruptcy case is not, in itself, conclusively fraudulent, Plaintiff is entitled to an opportunity to present other evidence of their fraudulent intent. This proof may come from showing the existence of a variety of factors, or ‘badges of fraud.’ ”). See e.g., In re Ganier, 403 B.R. 79, 84-85 (Bankr. D. Idaho 2009).

Hope this helps, and once again, I apologize for the misunderstanding, but it was beyond my control.






socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 33559
Experience: Attorney and Real Estate Broker -- Retired (mostly)
socrateaser and other Bankruptcy Law Specialists are ready to help you

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