Understanding the Bankruptcy Homestead Exemption

Welcome to today’s blog post. Today’s blog focuses on an issue of a reader. It’s a common issue for those who are older, retired, and maybe enjoying themselves and traveling a lot. However, it could also apply to other situations, which we will review. So this blog post focuses on bankruptcy homestead exemption issues, and how this could affect your case and cause issues with the bankruptcy trustee.

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Key Points:

• Homestead exemptions and bankruptcy exemptions are different. While you may qualify for a homestead exemption for property tax purposes, it doesn’t necessarily protect your property in bankruptcy.
• Bankruptcy trustees can go back six months or more to review bank statements and other financial records. This can reveal inconsistencies, such as rental income that wasn’t disclosed on tax returns.
• Renting out your home while claiming a homestead exemption can be risky. If you’re not living in the property, the bankruptcy trustee may consider it a second property or investment property, which could be subject to liquidation.
• It’s important to be honest with your bankruptcy attorney about your financial situation. Misrepresenting your income or assets can lead to serious legal consequences, including additional debt and potential criminal charges.

So, the issue is that the debtor is retired and traveling in an RV. My dream! Thank you for taking away my dream. I want to be able to do that. I could do the videos from the RV—wouldn’t that be awesome? Different backgrounds all the time, from the deserts of Arizona to the bright lights of New York City. But I’m stuck here. Okay, I got sidetracked, so I’m back to business.

The Bankruptcy Homestead Exemption

So here’s the issue. You are retired and constantly traveling, so why not have someone pay your mortgage? There’s no issue with that until bankruptcy is filed, and we have to deal with homestead exemptions. I will get into that in a second, but if you’re renting your house out, the first issue is whether you are including that in your taxes. If you’re not, the trustee could consider it as underreporting income, which could be tax fraud. This could result in the U.S. Trustee’s Office getting involved.

That’s why I always ask clients these questions and ensure their tax returns are consistent. One question from the trustee leads to another and another, and that’s when things get complicated. It’s easier to tell clients to complete their tax returns correctly and then file for bankruptcy.

In this case, the reader met with a bankruptcy attorney who said, “Oh, you claim homestead exemption, so you’re all good. All your mail goes there and everything else.” That is wrong.

What is homestead exemption for purposes of the county giving you a tax break is different from homestead exemptions when it comes to bankruptcy. They are two different things.

You can go live with your domestic partner, parents, or whoever, and rent out the house and still claim the homestead exemption. But in the bankruptcy world, the trustee is going to find out if you’re not residing there. This is besides the fact that the RV is not exempt.

But here’s the issue: trustees go back at least six months on your bankruptcy filing with bank statements. They’re going to see deposits that were made into the account. At the 341 Meeting of Creditors, they’ll ask, “Who’s this person consistently depositing, let’s say, $1,000 per month?” Now, the bankruptcy trustee knows there’s a renter in your property.

• Understanding 341 Meeting of Creditors in Bankruptcy: What to Expect

The trustee will look at the tax returns and confirm that rental income is listed, especially since it could result in failing the means test. Now you went from a Chapter 7 bankruptcy to Chapter 13.

The more significant issue is if you don’t live there, guess what? It’s not homestead property, and it’s not exempt. The bankruptcy trustee could treat it as a second property or investment property.

Many times, a debtor may move in with their partner and rent out their place. Well, that property is no longer protected in bankruptcy under the homestead exemption. The bankruptcy trustee will treat it as a second property, and none of it will be exempt, not even in Florida, which has a 100% exemption for homes. In that situation, 100% of the equity will not be protected.

So, you have to be careful in this situation where you claim a homestead exemption. The county will probably never find out, but the bankruptcy trustee will. Now, if you’re living there and renting it, that’s another issue, right? That’s not a problem because you’re just renting a room. Again, it’s taxable income that should be shown there. The expenses should be higher, too, since there’s another person using electricity, water, etc.

People often say, “The trustee is never going to know.” They will know, like they did with one of my clients. At the creditors’ meeting, the question was, “Who’s this person that gets mail at your address?”

In my case, the client’s son was trying to get a deduction on car insurance, and through questioning, the bankruptcy trustee found out my client gave a cash deposit for his son’s sports car.

These issues quickly resulted in a 2004 examination, which is the same as a deposition. It could get even more complicated with an adversary proceeding where the trustee wants to avoid granting certain debts as dischargeable.

• The Adversary Process – Rudy Giuliani’s Chapter 11 Bankruptcy

So, even if you’re living there and that rent is coming in, chances are that person receives mail there, and that’s how they’ll find out. You might think, “Well, they can’t because it’s a P.O. Box.” What about the car? The car is going to be registered with your address. So, if you have renters living in your property and you live there, please go over this with your bankruptcy attorney because it could be a huge issue.

Likewise, if you’re retired and enjoying life, that’s great. Just understand that the homestead and bankruptcy exemptions are two different things. While you might qualify for one, you may not qualify for the other. You want to avoid going to court and arguing about these things, considering your home is at risk. The trustee has basically unlimited resources and will litigate this because it’s to their advantage to do so.

So remember that six months is the minimum for bank statements. Some bankruptcy trustees go back a year, if not more. If the bankruptcy trustee isn’t satisfied with your responses at the 341 meeting of creditors, they can proceed with a 2004 examination and request additional documentation.

You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. For paralegals and students buying single copies, you can do so via Amazon Books. To access my YouTube channel, click this link.

Need to look for prior blog posts or other categories? Click the links below or use the search feature at the top of the page:

• Bankruptcy
• Your Wallet

Please note that the information on this site does not constitute legal advice and should be considered for informational purposes only.