Defining Residency Under the Federal Homestead Exemption

By: Sally A. Profeta

St.  John’s Law Student

American Bankruptcy Institute Law Review Staff


Recently, in In re Abraham, a bankruptcy court held that debtors living in Iran could not claim the federal homestead exemption for their real property located in New Jersey because the property did not qualify as their “residence” under section 522(d)(1) of the Bankruptcy Code.[1]  In Abraham, the married debtors moved to Tehran, Iran from New Jersey in 2011, seeking employment after the husband’s business income started to decline.[2]  Their children, however, continued to occupy the debtor’s New Jersey home, making payments for the mortgage, utilities, and the general maintenance of the property.[3]  In 2012, the debtors filed for bankruptcy in New Jersey and claimed an exemption for the New Jersey property.[4]  In their original Schedule C, the debtors claimed a $10,505.76 exemption in the New Jersey property.[5]  Subsequently, the debtors amended their Schedule C and claimed a $43,250 exemption in the property.[6]  The chapter 7 trustee objected to the debtors’ proposed exemption.[7]  The trustee argued that the property did not qualify as their residence, and the debtors filed their amended exemption in bad faith.[8]  In the husband’s certification, he indicated that, while the debtors lived and worked in Iran, they intended to return to the New Jersey property in the future.[9]  Yet this assertion contradicted the debtors’ previously filed certification in support of a motion to compel abandonment of the property, where they stated they did not intend to return to the United States in the near future.[10]  In addition to the husband’s certification, the husband offered his New Jersey driver’s license as proof of residency during a section 341 meeting of creditors.[11]  Therefore, the debtors argued that the New Jersey property was their “residence” under section 522(d)(1) of the Bankruptcy Code.  Ultimately, the bankruptcy court agreed with the trustee and denied the homestead exemption.[12]

Section 522 allows a debtor to elect specific federal exemptions under 522(d), or other exemptions available under the applicable state or federal law, unless the state in which the court sits had opted out of the federal exemption scheme.[13]  Under section 522(d)(1), which specifically provides for the homestead exemption under the federal exemption scheme, a debtor may exempt a portion of his or her interest for a value that cannot exceed $22,975[14] for a single debtor or $45,950 for joint debtors in real or personal property used as a residence.[15]  Since New Jersey has neither opted out of the federal exemption scheme, nor enacted a homestead exemption under state law,[16] a debtor in New Jersey can only claim the homestead exemption under section 522(d)(1),[17] which requires that the property serve as the “residence” of the debtor or a dependent of the debtor.[18]  Since the Bankruptcy Code does not define the term “residence,” courts are divided between applying the “plain meaning approach” and the “‘residence’ as ‘homestead’ approach.”[19]  Under the plain meaning approach, courts have defined the term “residence” more expansively as a “place where one actually lives,” accounting for multiple residences, or a place one dwells in “for some time.”[20]  For example, in In re Demeter,[21] the court determined that the term “residence” included multiple residences[22] and thus held that the debtors’ second residence qualified as an exemption despite their only living there for half of a year each year.[23]  In reaching this conclusion, the Demeter court reasoned that limiting modifiers like “principal” and “primary” exist in many other sections of the Bankruptcy Code, but are conspicuously absent from section 522(d)(1).[24]  Therefore, the Demeter court concluded that if Congress intended residence to be construed narrowly, then these modifiers would be superfluous when interpreting other sections of the Code.[25]  Under the “’residence’ as homestead’ approach”—the majority approach—courts define “residence” in a way that is consistent with how applicable state law defines he term “homestead.”[26]  For example, in In re Stoner, the court held that a residence temporarily occupied by the debtor in order to care for his ailing father did not qualify as a residence under the federal homestead exemption.[27]  The court defined “homestead” as a “principal residence,” adopting the meaning of the term as it is interpreted under New Jersey tax law.[28]  The majority in Stoner interpreted the term “residence” to imply that the debtor is residing there on a permanent basis, not just temporarily.[29]

Adopting the majority view and citing to Stoner, the Abraham court applied the “’residence’ as ‘homestead’ approach” and concluded that the New Jersey property did not functionally serve as the debtors’ residence.[30]  In particular, the Abraham court concluded that the debtors failed to demonstrate any “legal justification for a finding that the [New Jersey p]roperty [wa]s their principal residence.”[31]  Furthermore, the debtors failed to persuade the court that they intended to return to the United States, especially since they recently filed papers that stated otherwise.[32]  In addition, the court noted hat its decision did not violate the homestead exemption’s public policy goal of providing debtors with the necessity of a home because the debtor’s principal residence was in Iran.[33]  Given that the debtors did not reside in the New Jersey property for any significant period of time before filing for bankruptcy, and failed to demonstrate any intention to return shortly, the court denied the exemption as improper.[34]

The Abraham decision should serve as a cautionary tale for debtors considering bankruptcy.  In particular, for debtors who own multiple homes and occupy them for varying lengths of time, the court split between the plain meaning approach and the residence as homestead approach will play an important role in their decision to file for bankruptcy under chapter 7.  If a debtor files for bankruptcy in a plain meaning jurisdiction, the property (or properties) may be eligible for exemption regardless of the amount of time the debtor occupies the property.  Some courts may require that the property is at least in use for some minimum period of time,[35] or is occupied at some time prior to filing for bankruptcy,[36] and others may limit the exemption to only one property.[37]  Regardless, in those jurisdictions, there is less risk that a debtor’s proposed exemption will be denied on the basis that the debtor’s property is not his residence.  Conversely, in residence as homestead approach jurisdictions, the debtor’s eligibility to claim the homestead exemption may turn on his or her duration of occupancy in the claimed residence.  In Abraham, the eligibility of the debtors’ New Jersey property for exemption status hinged on the frequency of the debtors’ occupancy, as well as their intent to return.[38]  Their claim being denied, the debtor’s interest in the property where their children resided therefore fell within the reach of creditors.  In such a jurisdiction, a debtor considering bankruptcy may decide to file under chapter 13 or not file at all if he does not currently reside at his property because that property may be used to satisfy the debtor’s creditors’ claim if the debtor files for bankruptcy under chapter 7.

 Finally, if the court in a debtor’s jurisdiction has not yet decided the issue of defining “residence,” then it is likely the court will adopt the majority residence as homestead approach, which again may prevent a debtor from claiming an exemption on a property that is not their primary residence.  For this reason, it is essential that attorneys advising clients planning to file for bankruptcy inform them of this risk, and advise them that they may want to file under chapter 13 or not file at all if they are concerned about keeping their home.  Ultimately, however, it is important to realize that the conflicting definitions of “residence” will only affect a small class of individuals that own a home but do not currently live there, and will not likely pose a risk to many people filing for bankruptcy in the future.

[1] In re Abraham, 2014 WL 3377370, at *1 (Bankr. D.N.J. July 10, 2014).

[2] Id.

[3] Id.  The debtors also received $4,000 in support payments from their son and daughter.

[4] Id.

[5] Id.

[6] In re Abraham, 2014 WL 3377370, at *1.

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] In re Abraham, 2014 WL 3377370, at *1.

[12] Id. at *3.

[13] In re Stoner, 487 B.R. 410, 415 (Bankr. D.N.J. 2013); 11 U.S.C. § 522(d) (2012).

[14] 11 U.S.C. §522(d) (2012). The maximum exemption value is adjusted periodically for inflation. The value at the time of the court’s decision in Abraham was $21,625. In re Abraham, 2014 WL 3377370, at *2.

[15] 11 U.S.C. §522(d). Congress enacted the federal homestead exemption in order to satisfy the public policy goals of protecting a debtor’s equity in his or her family residence and providing him or her with the basic necessity of a home. In re Abraham, 2014 WL 3377370, at *2 (citing Stoner, 487 B.R. at 417).

[16] William Houston Brown et al., Bankr. Exemption Manual app. B31 (2012).

[17] 11 U.S.C. §522(d)(1).

[18] Id.

[19] In re Stoner, 487 B.R. at 415–416.

[20] Id.

[21] In re Demeter, 478 B.R. 281 (Bankr. E.D. Mich. 2012).

[22] Id. at 287–88.

[23] Id. at 292; Id. at 284. The debtors in Demeter also expressed their intention to reside in their second home full-time, before financial problems prompted them to attempt to sell it. Id. at 284.

[24] Id. at 287.

[25] Id.

[26] See In re Stoner, 487 B.R. at 416.

[27] Id. at 420.

[28] Id. at 422. (quoting Rubin v. Glaser, 166 N.J. Super. 258, 264 (N.J. Super. Ct. App. Div. 1979)) In Rubin v. Glaser, the court reasoned that the framers of a tax statute used the word “homestead” to refer to “a popularly understood concept of an owner’s principal residence.” Rubin, 166 N.J.Super. at 264. The Rubin court supported its finding with the decisions of courts in other jurisdictions that defined “homestead” as a place of actual occupancy, where mere intention to occupy is insufficient. Id. (citations omitted).

[29] Stoner, 487 B.R. at 422 (“this Court reads the term ‘residence’ in a manner requiring some measure of permanence. This approach is consistent with the New Jersey state law’s interpretation of the term ‘homestead,’ equating it to a principal residence.”).

[30] In re Abraham, 2014 WL 3377370, at *3.

[31] Id. at *2–3. The court added that the residence was more akin to an “investment property” than a residence.

[32] Id. at *2.

[33] Id. (citing Stoner, 487 B.R. at 417). Before the court’s decision in Abraham, the Bankruptcy Court of the District of New Jersey in In re Reschik set out the homestead exemption’s public policy goals, including, “to provide the debtor with the property necessary for survival” and “to protect the debtor’s family from adverse consequences of impoverishment.” In re Reschik, 343 B.R. 151, 156 (Bankr. W.D. Pa 2006) (quoting Alan N. Resnick, Prudent Planning or Fraudulent Transfer? The Use of Nonexempt Assets to Purchase or Improve Exempt Property on the Eve of Bankruptcy, 31 Rutgers L. Rev. 615, 621 (1978)).

[34] See Abraham, 2014 WL 3377370, at *2.

[35] See In re Lawrence, 469 B.R. 140, 142–43 (Bankr. D. Mass. 2012)(“The only requirement for eligibility under § 522(d)(1) is that the debtor “uses” the residence.”).

[36] In re Gandy, 327 B.R. 807 (Bankr. S.D. Tex. 2005) (“Under the plain language of the statute, the phrase ‘uses as a residence’ indicates a present use or occupancy as opposed to future intent to occupy. Accordingly, the Court concludes that § 522(d)(1)’s plain language unambiguously requires actual occupancy at a point prior to the bankruptcy filing.”).

[37] Id. at 143 (holding that the debtor who owned two properties was entitled to exempt one, but only one under Section 522(d)(1)).

[38] See generally In re Abraham, 2014 WL 3377370, at *2–3.