Commonly, people in financial difficulty own multiple properties that they could claim as a residence. This is important, because bankruptcy code section 522(d)(1) affords a right to protect from sale an “interest” in real estate or other property that serves as a “residence” for the debtor or a “dependent”. Clever attorneys can try to use this to protect property other than the debtor’s principal residence. That right has been limited in a recent decision in New Jersey.
Very recently, bankruptcy Judge Michael Kaplan held in In re Stoner, that the exemption only applies to property that the debtor actually intends to use as a “homestead”, and held that the debtor there could not claim as exempt the proceeds of property owned and occupied by his father until a few days before the bankruptcy filing, because he did not have an intention to live there.
Unbeknownst to the debtor, his father had died a few days before his bankruptcy filing. For two years, the debtor claimed another property where he actually lived as his residence. Since he was the executor of his father’s estate, he sold the father’s property, pocketed the proceeds, then changed his mind and claimed his share of his father’s property as exempt. The trustee successfully challenged this claim.
Judge Kaplan first held that because, as of the date of the bankruptcy filing, the debtor held the legal right to sell the property and a partial interest in it as a beneficiary, he held an “interest” in the property that he could exempt. The next question, which was determinative, was whether that interest was in a “residence” to which section 522(d)(1) applied. Bankruptcy courts have taken different approaches to this question. However, Judge Kaplan looked to the law of New Jersey and other states, seeking a definition of the term “residence”. He also looked at what Congress intended in creating the “homestead” exemption. With all this before him, Judge Kaplan held that the term “residence” requires “some measure as the Debtor’s of permanence” and that “[t]his approach is consistent with the New Jersey state law’s interpretation of the term “homestead,” equating it to a principal residence.”
Applying this standard to the case before him, Judge Kaplan found “no support for any finding that the Debtor considered the decedent’s residence principal residence or that he intended his stay there to be permanent. The Debtor has not submitted any change of mailing address forms, change in driver’s license or indication as to where he was registered to vote at the time of his filing. Further, the fact that the Debtor did not seek to amend his schedules until nearly two years after he filed his Petition lends further support to the Court’s conclusion.”
This will be of significance to anyone with multiple properties. Clearly, anyone who wants to claim an exempt residence a vacation home or property in which parents reside will have a harder time, if other courts follow Judge Kaplan’s lead. Careful planning and guidance by an experienced bankruptcy attorney is more important than ever.