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Are Equalization Payments A Debtor Receives In Exchange For A Transfer Of Interest In A Marital Piece of Real Property Protected By A Homestead Exemption?

divorce property division settlement-thumb-275x190-44617.jpgA equalization payment is a common why a litigant in adivorce gets bought out of his interest in a piece of marital real property. Let's say for example, the family residence subject to a divorce has $50,000 of equity, yes it still happens. During that divorce proceeding it is decided by the parties that the wife will receive the home as her sole a separate property. In exchange for this award, wife will pay to husband $25,000, which represents his interest in this community asset. The husband, after the divorce, is forced to file for bankruptcy. In his bankruptcy petition, the husband, now debtor, moves to exempt his $25,000 by utilizing the state's homestead exemption. Can he?

The Bankruptcy Appellate Panel for the 9th Circuit has said NO!

In the bankruptcy case of In re Jefferies the Bankruptcy Appellate Panel affirmed a bankruptcy court order sustaining an objection to a homestead exemption claim. The court held that an equalizing judgment a debtor received in exchange for the transfer of his residence to his ex-spouse in a dissolution decree did not constitute proceeds of the voluntary sale of his homestead eligible for protection under the Washington homestead exemption.

Jack Jefferies filed a chapter 7 bankruptcy petition. Before filing bankruptcy, he and his wife had obtained a marriage dissolution decree from a Washington state court. The decree awarded Jefferies an "equalizing judgment" for his interest in the real property awarded to his wife. In furtherance of the dissolution decree, Jefferies had conveyed his interest in the former marital residence to his ex-wife.

The trustee objected to Jefferies's listing of exempt "proceeds from sale of homestead" on his bankruptcy Schedule C. The Trustee asserted that because Jefferies no longer lived at the residence and was divested of his interest in the residence through the divorce decree, he failed to meet the requirements of Washington's homestead exempt ion statutes and was unable to claim the exemption.
The bankruptcy appellate panel affirmed, holding that Jefferies could not claim the homestead exemption.

Under Washington Law, a homestead is exempted from attachment for debts of the owner, as are the proceeds from a voluntary sale of the homestead, made in good faith for the purpose of acquiring a new homestead.

The court agreed that any property taken in exchange for the transfer of a homestead is considered to be "proceeds" for purposes of the homestead exemption statute. This included the equalizing judgment here. Likewise, Jefferies offered an uncontroverted declaration that he intended to use the proceeds to purchase a new homestead.
The sole issue was whether Jefferies's transfer of the residence to his ex-wife must have been a voluntary sale. In that regard, it was apparent that Jefferies transferred the residence to his ex-wife not because of purely economic reasons or because he could not maintain the residence. Instead, the transfer was part of a state court dissolution process and allocation of marital property.

If CA Bankruptcy Courts interpret California's homestead exception similarly, family law attorneys would be well advised to put the reasons why the transfer of title is being made in the Marital Settlement Agreement itself. While no guarantee, the more voluntary the transfer looks, the better of the Client may be.

The Law Offices of James V. Sansone assists individuals file for bankruptcy protection under the United States Bankruptcy Code and handles all areas of family law. We are located in Santa Rosa, California and serve clients throughout Sonoma County, Mendocino County, and Lake County, including Santa Rosa, Petaluma, Cotati, Rohnert Park, Sebastopol, Healdsburg, Sonoma, Kenwood, Glen Ellen, Windsor, Bodega Bay, Ukiah, Willits, Clearlake, Lakeport, and Kelseyville.

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