Lien on home not exempt in bankruptcy

Jack Zemlicka

Family law attorneys need to be aware of a recent opinion from the bankruptcy court if a client is in the process of getting a divorce and a subsequent bankruptcy appears likely.

If one spouse quitclaims his interest in the family home to the other in exchange for a balancing payment later, he may not be able to claim any homestead exemption when he later declares bankruptcy.

Unless the spouse files bankruptcy within two years after moving out, or he reinvests the balancing payment in a new home, the homestead exemption will be lost, and the right to receive the payment will belong to the bankruptcy estate.

Daniel A. Fink and his former wife jointly owned and lived in a house in Lomira from 1992 to 2001, when they divorced.

Under the divorce decree, Fink’s wife was awarded all interest in the house, subject to mortgages owed to the bank and a cash balancing payment to Fink of $25,000, due by 2011.

In 2009, Fink declared bankruptcy, and listed $20,200 worth of the mortgage as exempt homestead property under 11 U.S.C. 522(d)(1).

The trustee objected, and U.S. Bankruptcy Court Judge Margaret Dee McGarity sustained the objection in an Oct. 27 order.

Judge McGarity found that Fink’s mortgage in the property did not qualify under the statute as an “aggregate interest … in real property or personal property that the debtor or a dependent of the debtor uses as a residence.”

The court began by noting a split of authority over whether the plain language of sec. 522(d)(1) negated any need to resort to state law to determine whether an interest is homestead property, or whether state law defines what is a “homestead.”

It was undisputed that the house was the residence of two dependents of Fink (his children); but the court noted that “aggregate interest” is undefined in the statute. Accordingly, the court looked to Wisconsin law to determine the issue.

Under Wisconsin law, a mortgagee (such as Fink) has no legal title in mortgaged premises, but is merely the holder of a security interest.

In addition, Wis. Stat. sec. 815.20 defines the extent of the homestead exemption as follows: “An exempt homestead … selected by a resident owner and occupied by him or her shall be exempt from execution … to the amount of $40,000 … except as otherwise provided. The exemption shall not be impaired by temporary removal with the intention to reoccupy the premises as a homestead nor by the sale of the homestead, but shall extend to the proceeds derived from the sale to an amount not exceeding $40,000, while held, with the intention to procure another homestead with the proceeds, for 2 years.”

For several reasons, the court held that Fink did not meet the burden of fitting his interest into the statutory definition.

First, he had no intention of reoccupying the premises as a homestead; instead, he had asserted that he intended to establish a new homestead after his lien was paid in 2011.

Second, he had moved out of the house more than two years earlier. Thus, the case was distinguishable from several Wisconsin bankruptcy cases finding that the debtor owned homestead property: In re Nabbefeld, 76 B.R. 132 (Bankr.E.D.Wis.1987); In re Lumb, 12 B.R. 862 (Bankr.E.D.Wis.1981); and Matter of Gullickson, 39 B.R. 922 (Bankr.W.D.Wis.1984).

In each case, the court held that the debtor could claim the homestead exemption in his former marital home because he filed his bankruptcy case less than two years after the divorce was initiated.

Judge McGarity concluded, “Mr. Fink is not an owner, he is not a resident, the proceeds from the sale of his interest continue to be held by him in the form of a secured lien, more than two years passed pre-petition since he has had any possessory or ownership interest and without reinvestment of the proceeds of the sale of his former homestead. His lien interest cannot rise to the interest of a ‘resident owner’ under these circumstances.”