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 Brewer Offord & Pedersen LLP at (650) 327-2900, or visits our firm website to learn more about our attorneys and their practice areas at www.BrewerFirm.com.