Bankruptcy Court Finds Exception to “Snapshot” Rule.


Henry Chuang

by Henry Chuang on May 14, 2012

in Bankruptcy, Foreclosure

The Ninth Circuit Court of Appeals recently ruled that in order for debtors to receive the benefit of the homestead exemption after a forced sale of their home, they must reinvest the proceeds in another home.  The Court held that the “Snapshot” Rule, the general principle where the status and value of everything is determined at the time of filing, did not apply to homestead exemptions.  The Court decided held that California’s homestead statute requires reinvesting the proceeds in a new home within 6 months.  This holding demonstrates the importance of state law in applying bankruptcy statutes and puts into question the value of the homestead exemption.

In Wolfe v. Jacobson, a creditor, Cunningham,  received a judgment against the Jacobsons after 15 years of litigation.  After preventing a discharge in the initial bankruptcy for the wife, Cunningham, the creditor, was able to force the sale of the Jacobsons’ home in the wife’s second bankruptcy proceeding.  When the home was sold, the Jacobsons received $150,000 due to their homestead exemption.  However, because they did not reinvest that money in a new house, the trustee filed suit to force the Jacobsons to turn over the $150,000.  Although the trustee lost in the bankruptcy and bankruptcy appellate court, he prevailed on appeal.  At the appellate level the Court found that states have the freedom to decide what exemptions are allowable and on what terms.  Since California determined that a homestead exemption is valid only when the debtor reinvests the proceeds within six months, the bankruptcy court did not have the authority to overturn that public policy decision.

The takeaway of this ruling is the fact that state exemptions trump other bankruptcy provisions.  While bankruptcy rules are designed to give the debtor a clean slate, that is balanced by the states’ determination of the rights of creditors and debtors.

Additionally, given the cost of homes in Silicon Valley, this ruling throws into question the value of the homestead exemption.  It is difficult to imagine that someone in bankruptcy would be able to obtain sufficient financing to purchase another home, even after receiving $150,000 from the homestead exemption.

If you or someone you know may need legal assistance regarding such matters, don’t hesitate to contact the Law Offices of Peter N. Brewer at (650) 327-2900, or visits our firm website to learn more about our attorneys and their practice areas at www.BrewerFirm.com.

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{ 5 comments… read them below or add one }

avatar Daniel May 15, 2012 at 6:10 pm

This is a very intriguing and important issue. I have gained a lot of knowledge on bankruptcy and the “Snapshot” rule here. What advantages do you get from that rule by the way? Thank you very much for sharing this information to everybody.

avatar Henry Chuang May 15, 2012 at 6:25 pm

The snapshot rule makes it easier for everyone to determine valuation and the nature of the asset as it sets a specific time to refer to.

avatar Gabe B May 16, 2012 at 6:17 pm

Very informative post! I have been reading a lot about bankruptcy courts lately. Is this exception in effect already? Love this post!

Thanks for sharing!

-Gabe

avatar Henry Chuang May 16, 2012 at 6:22 pm

Gabe,
Thank you. Technically, this was just an interpretation of the law so it was always in effect, but yes, now that the ruling has come down, it will give guidance to courts on how to deal with this issue.

avatar Sidney Lanier June 7, 2012 at 6:53 pm

The cite is In re Jacobson, 676 F.3d 1193 (9th Cir. 2012). Appellees’ Petition For Rehearing was denied June 7, 2012. The court held that merely filing a chapter 7 petition to achieve an extended homestead exemption not otherwise available outside bankruptcy was not permitted under California law.

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