The road through the briar patch of financial troubles has, in many jurisdictions, always passed by a homestead. Prudent debtors have normally taken advantage of the ability to shelter both their estates and their families in the homestead. Homebuyers buy ever more expensive homes. Recent case law and the proposed Bankruptcy Reform Act of 2001 (S. 420) take aim at this protection.

Litigation involving homestead exemptions normally arises out of interpretations of state law. 11 U.S.C. §522(d)(1) creates a limited federal homestead exemption:

...debtor's aggregate interest, not to exceed $16,150 in value in real property or personal property that the debtor or a dependent of the debtor uses as a residence, in a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence...

Most debtors elect to claim homestead exemptions under more generous state laws, making every effort to maximize that exemption. Several recent court decisions address the limits of the homestead exemption.

In this age of inherited property, life partners and spouses who have separate asset-protection plans, the ownership of the homestead can vary. The debtor in In re Abernathy, 2001 W.L. 224521 (8th Cir. BAP (Mo.) March 8, 2001), owned a homestead in joint tenancy with her two sisters. The chapter 7 trustee objected to the homestead exemption claim made. The debtor claimed the full amount allowed under Missouri law. The trustee successfully argued to the bankruptcy court that the debtor, as one of three joint tenants, was only entitled to one-third of the maximum available exemption.

The bankruptcy appellate panel (BAP) pointed out that the debtor's interest in jointly held property becomes property of the estate while the non-debtor's interest does not become property of the estate, citing Winters v. George Mason Bank, 94 F.3d 130, 134 (4th Cir. 1996). Upon analysis of the Missouri homestead exemption statute, the BAP concluded that the plain meaning of the statute was that a single owner, out of several, could claim the entire homestead amount. Distinguishing joint tenancies from tenancies by the entirety, the court rejected the trustee's argument that the exemption must be limited in order to prevent the other joint tenants from also claiming an exemption in the same property. The BAP declined to speculate on facts not in issue and reversed the bankruptcy court.

The 8th Circuit BAP reviewed the necessity that the debtor "occupy" the property claimed exempt as a homestead in In re Stenzel, 259 B.R. 141 (8th Cir. BAP (Minn.) March 2, 2001). The factual landscape in this case is typical of estate planning approaches for the family farm. The debtor lived on a five-acre parcel, contiguous to the family farm owned by the debtor's mother. Even though the debtor and his wife worked the family farm for more than 23 years, the surviving mother, who lived in a house on the family farm, retained a life estate. The debtor only had a remainder interest. The bankruptcy court found that the debtor "owned" the five-acre parcel, and that the adjacent remainder property was contiguous to that parcel. The bankruptcy court held that the debtor proved occupancy of both parcels by presence and use and upheld the homestead exemption claim.

The BAP stated that the debtor must own and occupy the claimed homestead under Minnesota law. In reversing the bankruptcy court, the BAP held that occupancy required a legally enforceable right. The debtor did not have a legal right to occupancy because the mother, a life tenant, had the legal right to occupy the property. The mere facts of presence and use were not sufficient to create a homestead exemption.

A Florida bankruptcy court also has recently addressed an aspect of the homestead exemption. In re Binko, 258 B. R. 515 (Bankr. S.D. Fla. 2001). In this case, the debtors sold their homestead prior to bankruptcy, generating about $40,000 in equity. These funds were segregated for the purchase of a new homestead. Prior to that purchase, some of the segregated monies were used for living expenses. The debtors claimed the remaining proceeds exempt as homestead proceeds under Florida law. The trustee objected on the basis that the exempt character of all the proceeds was lost when the debtor used some of the proceeds for another purpose. Finding that the debtors' actions evidenced all the elements of good faith in attempting to reinvest in a homestead, and finding that the debtor did not commingle, but rather segregated the proceeds, the court overruled the trustee's objection.

The Bankruptcy Reform Act of 2001 attempts to limit homestead exemptions in two ways. First, an amendment to the Senate bill prohibits an exemption exceeding $100,000 in a homestead bought within two years of bankruptcy. (Amendment #68, S. 420) The goal is to avoid bankruptcy exemption planning by wealthy debtors who move to states with liberal homestead exemptions. Another provision limits the debtor's interest in a homestead by the amount of non-exempt property transferred to pay down a homestead mortgage during the seven years prior to bankruptcy if done to hinder, delay or defraud creditors. (§308, S. 420) With median home values exceeding $160,000 in many parts of the United States, the home may no longer "shelter" assets of the debtor.