The Homestead Exemption and Substance Abuse

An odd couple you say?  The skit put on at the Inns of Court meeting last week made me want to have another beer, then retire.  There were three would-be clients who had three issues that I thought I knew (one I actually did).  The poor lawyer, 40 years experience he kept saying, gave the wrong advice three times, started tipping the bottle and received advice from the state bar – very well done.

Client one had just sold their home.  They had $65,000 proceeds in the bank.  “That money’s safe if I file chapter 7 now – right?”  ”No doubt about it, I’ve been doing this for 40 years.”  Wrong.  That exemption applies only if the debtor has actually filed a Declaration of Homestead prepetition.  Gulp.

Client two had just sold their home.  They had $65,000 proceeds in the bank.  “That money’s safe if I file chapter 7 now – right?”  “No doubt about it, I’ve been doing this for 40 years.”  Wrong.  That exemption applies only if the debtor actually reinvests the proceeds in a new home within six months from the sale of the first.  The trustee can hold up the estate closing and wait for the reinvestment.  No reinvestment, the proceeds magically become not exempt at the end of the six months.  (I knew that one).

Client three still owned the home.  They wanted to file chapter 7, sell the home and use the $175,000 proceeds for retirement.  ”We can do that - right?”  “No doubt about it, I’ve been doing this for 40 years.”  Wrong – sort of.  A secured creditor got relief from stay during the case and foreclosed.  The debtors got the $175,000 from the sale.  They did not reinvest it.  At the end of the six months, the trustee was there with his hand out.  The exemption applies again only if the debtor reinvests within six months.  This is actually a new 9th Circuit case, In re Jacobson.

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