Jump to Navigation


The Homestead Exemption Debate

February 22, 2008

Most creditors attempting to collect from a bankrupt borrower in Texas are hopelessly barred from recovering against a debtor's homestead if the borrower/debtor elects the homestead exemption under the Bankruptcy Code.  With limited exceptions, homesteads are generally protected from forced sale for the repayment of debts.

Congress sought to grant creditors some relief from abuse of the homestead exemption in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.  Specifically, the Act amended § 522(p)(1) of the Bankruptcy Code to cap the state law homestead exemption at $136,875[1] if the debtor acquired the interest in the property during the 1,215-day period preceding the bankruptcy filing.  This homestead exemption cap was intended to provide relief for creditors who, prior to the cap, may have been barred from pursuing the debtor's homestead in the struggle to recover unpaid debt. 

However, all that glisters is not gold.  Crafty debtors have attempted to circumvent the homestead exemption cap by claiming that it does not apply to property acquired outside of the 1,215 day cut off even if the property was not designated as homestead until some time within the cut off period. 

For example, a debtor with an interest in two pieces of real property may decide, after being divested of all interest in the property with the homestead designation, to claim the homestead exemption on the remaining property at the time they file bankruptcy.  That is precisely what occurred in In re Rogers, No. 06-11263, 2008 U.S. App. LEXIS 129 (5th Cir. Jan. 4, 2008), where the Fifth Circuit decided that this type of clever maneuvering of assets will protect a homestead in Texas without any dollar value cap.

In that case, the Fifth Circuit analyzed the scope of the homestead exemption cap to decide "whether the homestead exemption cap applies to a homestead interest established within the 1,215-day period preceding the filing of the bankruptcy petition despite the fact that the debtor acquired title to the property before that statutory period." In re Rogers, No. 06-11263, 2008 U.S. App. LEXIS 129 (5th Cir. Jan. 4, 2008). To answer this question, the court analyzed whether the "interest" that must be acquired for the cap to apply is the "homestead interest" or a "vested economic interest" in the property.  The Fifth Circuit held that the cap only applies to vested economic interests that are acquired during the 1,215-day period preceding the bankruptcy filing.  According to the court, unlike the acquisition of title to property, a "homestead interest" does not give the owner vested economic rights.  Therefore, individuals acquiring title to property before the statutory period are not subject to the homestead exemption cap merely because they acquire their homestead interest within the 1,215-day period prior to filing bankruptcy.

This is an important decision and issue to watch as the Fifth Circuit's decision is in direct conflict with a decision currently on appeal in the Ninth Circuit.  If the Ninth Circuit affirms the conflicting decision, the homestead exemption debate may soon resurface in the United States Supreme Court.  For now, the Fifth Circuit's recent decision erects a substantial obstacle to creditor collection efforts against a debtor's homestead notwithstanding Congress' recent effort to enhance creditor rights in this regard.

[1] For cases commenced before April 1, 2007, the dollar amount was $125,000.