Homestead Exemption Upheld Despite $184,000 Investment Within 10 Yea...

The 2005 bankruptcy law contains a provision which intends to stop debtors from converting non-exempt funds in to homestead properties otherwise exempt under state law. The Code section provides for loss of homestead exemption to the extent a Chapter 7 debtor used non-exempt assets, such as cash, to buy a homestead within 10 years preceding bankruptcy bankruptcy  when the debtor purchased the homestead with the intent to defraud creditors.  Sometimes I hear clients ask whether the new law means that they cannot exempt in bankruptcy money used to buy a Florida homestead in the past 10 years.

No, the law does not mean you cannot by a house within 10 years of filing bankruptcy. As long as the facts show that the primary purpose of buying a Florida homestead was to have a residence for your family, and that you did not stuff an unreasonable amount of non-exempt cash in to the homestead, courts will usually not find you bought a home to defraud bankruptcy creditors. 

In a recent court decision on this issue a bankruptcy court denied an objection to a debtor’s homestead exemption when a debtor invested almost $200,000 cash as a down payment for a home costing $800,000. Despite the relatively high house price, the court upheld the exemption of the debtor’s down payment because it found that the debtor’s primary purpose was to ensure a place to live in a stable and permanent residence and there was no extrinsic evidence of motive to defraud creditors. 
I have rarely seen creditors or trustees challenge homestead exemptions under th 10 year fraud provision.

In light of the liberal interpretation of the homestead exemption I think courts will require clear evidence that the debtor’s primary purpose of a homestead purchase, or the payoff of a mortgage, was creditor avoidance. As this particular case noted there are many reasons why a person buys a home or pays off a mortgage other than intentional avoidance of creditors. In re Cook, Case No. 11-50287