Automatic Homestead: All homeowners receive an automatic homestead exemption of $125,000 even if they have not recorded a declaration of homestead.

Declared Homestead: All homeowners who have recorded a declaration of homestead now receive an exemption of $1,000,000.

Elderly or Disabled: All homeowners who are over the age of 62 or who are disabled receive an exemption of $1,000,000. This exemption is doubled for a married couple who are co-owners ($1,000,000 each).

The Homestead Act is complicated. There are limited protections for dependents who live in the home. There are special protections for divorcing homeowners. There are limitations to the exemption for certain types of debts. It also has specific application and some possible limitations when asserted in connection with a bankruptcy case. It’s important to consult an attorney to understand the extent of the protection available to you before you record a declaration of homestead.

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Gordon Green filed for Chapter 7 bankruptcy on May 11, 2021, listing his “Sun Life: Life Income Fund,” a Canadian Registered Retirement Savings Plan, as an asset. Green sought to exempt the fund under Illinois statute 735 ILCS 5/12-1006, which exempts assets intended in good faith to qualify as a retirement plan under applicable provisions of the Internal Revenue Code (IRC). The bankruptcy trustee objected, arguing that the fund, organized under Canadian law, did not qualify for the exemption. The bankruptcy court agreed, holding that a retirement plan must be organized under IRC § 401(a), which requires the trust to be created or organized in the United States.

Green appealed to the United States District Court for the Northern District of Illinois. The district court rejected the bankruptcy court’s country-of-origin requirement but still found that the Sun Life Fund was not a tax-qualified retirement plan under the IRC. Consequently, the district court affirmed the denial of the exemption.

The United States Court of Appeals for the Seventh Circuit reviewed the case de novo. The court examined whether the Sun Life Fund qualified as a retirement plan under applicable provisions of the IRC. The court noted that the IRC does not specifically define “retirement plan” for this purpose and that Illinois law requires the plan to qualify under applicable IRC provisions. The court found that the Sun Life Fund did not meet the criteria for tax-qualified retirement plans under the IRC, as it was not governed by any specific IRC provision that regulates retirement plans. The court affirmed the district court’s decision, holding that the Sun Life Fund was not exempt under Illinois statute 735 ILCS 5/12-1006.

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The term “avoid” is a bankruptcy term of art akin to “reverse” or “undo” in layman’s terms. Certain sections of the Bankruptcy Code permit a trustee or, in some circumstances, a debtor, to avoid transfers of money or property that occurred before the bankruptcy case was filed. A foreclosure auction is a transfer for bankruptcy purposes. Since at least the decision in In re Mularski, 565 B.R. 203 (Bankr. D. Mass. 2017), many Chapter 13 debtors have been successful in avoiding a foreclosure sale under specific sections of the Bankruptcy Code when the bankruptcy case is filed after the sale takes place, but before the foreclosure deed is recorded.

The legal mechanics to avoid of a pre-petition foreclosure are briefly described as follows.

Bankruptcy Code § 544(a)(3) states:

(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by— … (3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.

Bankruptcy Code § 522(h) states:

(h) The debtor may avoid a transfer of property of the debtor or recover a setoff to the extent that the debtor could have exempted such property under subsection (g)(1) of this section if the trustee had avoided such transfer, if— (1) such transfer is avoidable by the trustee under section 544, 545, 547, 548, 549, or 724(a) of this title or recoverable by the trustee under section 553 of this title; and (2) the trustee does not attempt to avoid such transfer.

Put simply, these two statutes state that a bankruptcy debtor may avoid a pre-petition transfer if the trustee does not elect to do so, as long as the transfer was not perfected under state law prior to the bankruptcy case and there was no notice of the transfer to potential bona fide purchasers prior to the bankruptcy case (note that both perfection and notice must be lacking). The debtor must also comply with § 522(g)(1), which states that the transfer must not have been voluntary, was not concealed, and the property that was transferred would have been part of the bankruptcy estate when the case was filed and exempt from claims of creditors if the transfer had not occurred.

In this case, Tran v. Citizens Bank, the lender conducted a mortgage foreclosure sale of the debtor’s home on August 16, 2022. The debtor filed a Chapter 13 bankruptcy case 28 days later on September 13, 2022 and initiated an adversary proceeding to avoid the foreclosure sale. Before the bankruptcy case was filed, however, the lender recorded a foreclosure deed and other documents required by Massachusetts foreclosure law, including an Affidavit of Sale. The deed apparently lacked proper notarization and the debtor argued that such a defect rendered the deed ineffective to perfect the transfer and convey the property to the buyer, and in the absence of a proper deed, the recording of the Affidavit of Sale alone was insufficient to give constructive notice to third-parties that the debtor’s interest in the property had been transferred. Both the Bankruptcy Court and the District Court held that the recording of the Affidavit of Sale before the bankruptcy case was sufficient notice to third parties under state law because Massachusetts is a “notice” jurisdiction, therefore when the Affidavit of Sale was recorded, it acted as “notice to the world” – including any potential bona fide purchasers – that the foreclosure had taken place. Finding that there was notice of the pre-petition transfer sufficient to defeat avoidance under § 544, the Court did not arrive at any conclusion as to whether the transfer was perfected.

As of the date of this article, the Debtor has filed a notice of appeal to the First Circuit Court of Appeals.

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New Hampshire Supreme Court Opinions

2022-bnh-003 Brady vs Sumski NH Homestead

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On a question where the courts are split, Chief Bankruptcy Judge Magdeline D. Coleman of Philadelphia decided that dismissal is not mandatory under Section 109(g)(2) if an individual voluntarily dismissed a prior case within six months of filing a new case.

The debtor had the appearance of a serial filer. He had filed a chapter 13 petition in 2016 and received a discharge in 2021. While the first case was pending, a creditor had filed a non-dischargeability suit that wasn’t resolved before the debtor filed a second chapter 13 petition in early 2022.

In the second case, two creditors filed motions to modify the automatic stay, which Judge Coleman granted. In the first, the creditor was permitted to continue the non-dischargeability suit in the first case. Subsequently, the debt was held to be nondischargeable.

In the second motion, a secured creditor wanted the stay lifted given the debtor’s failure to provide adequate protection. The second lift-stay motion was settled.

After both lift-stay motions were resolved, the debtor voluntarily dismissed the second chapter 13 case. Less than a month later, the debtor filed his third chapter 13 petition. The debtor stated that he had dismissed and refiled to take advantage of the larger debt limit that Congress had offered to chapter 13 debtors.

The same creditors who had lifted the stay in the second case filed a motion to dismiss the third case. They argued that the debtor was barred from filing under Section 109(g)(2). If an individual or a family farmer has voluntarily dismissed a previous case within the prior 180 days, the section bars the debtor from filing anew if “the debtor requested and obtained the voluntary dismissal of the case following the filing of a request for relief from the automatic stay.” [Emphasis added.]

Judge Coleman said that the courts are split, even within her own district. In 1999, a district judge adopted the so-called “temporal” approach and interpreted the word “following” to mean that the court must dismiss a subsequent case if it came after the filing of a lift-stay motion in the prior case, regardless of the reason why the debtor dismissed the prior case.

Judge Coleman cited a decision from her district 10 years later where the bankruptcy judge used the so-called “causal” approach, requiring dismissal of the new case if there was a causal connection between the lift-stay motion and the debtor’s voluntary dismissal of the prior case.

There being no binding authority from the Third Circuit, Judge Coleman opted for the causal approach. She decided that “a cramped reading of the word ‘following’ to mean ‘subsequent to’ strips §109(g)(2) of its intended purpose . . . to prevent debtors from using repetitive filings as a method of frustrating creditor[s’] efforts to recover what is owed them.”

According to Judge Coleman, the “temporal approach can lead to overly harsh results that do nothing to serve the statute’s purpose of preventing abusive bankruptcy filings.” To her way of thinking, “the better approach is to view ‘following’ to mean that a debtor’s voluntary dismissal of a prior case was ‘as a result of’ a stay relief motion.”

Judge Coleman found as fact that the debtor had not dismissed the second case “as a result of” either of the lift-stay motions. Furthermore, both had been resolved before the debtor voluntarily dismissed the second case.

Finding that the debtor had dismissed the second case to avail himself of the enlarged debt limit in the third case, Judge Coleman denied the motion to dismiss the third filing.

In re Higgins, 22-12021

Bankr. E.D. Pa. March 3, 2023

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