In the on-going saga of Missouri bankruptcy exemptions, some apparently-settled debtor protections have recently been destabilized.  And this caused an apparent split among bankruptcy judges on at least some of these protections.

Recently, this on-going evolution visited the daily wages of consumers.  Missouri has a law which protects a large portion of an individual’s income from her own services from collection by creditors, often called the “wage” exemption.  It is similar to a federal law which sets the outside maximum a creditor can garnish from personal income.

In years past, the U.S. Supreme Court has held that the federal law is not intended as an exemption in a bankruptcy case.  And some states have followed this as to their own “wage” protection laws.

But as we know, states can  make their own laws about exemptions to be used in bankruptcy.  And Missouri has opted to go the other way.

Beginning 22 years ago in bankruptcy court with In re Sanders, 69 B.R. 569 (Bankr.E.D.Mo.  1989), Missouri courts began recognizing this statute as a protection for earnings still owed to a debtor.  The Court of Appeals accepted this principle in In re Wallerstedt, 930 F.2d 630 (8th Cir. 1991) and In re Parsons, 280 F.3d 1185 (8th Cir 2002)  — while rejecting it in application in those cases.  These courts consistently held or applied it as a bankruptcy exemption. There does not appear to have ever been a contrary state court decision.

The rule itself provides that an amount owed to a person as compensation for her own labor or “personal services” are protected up to 75% or up to 90% if the person is the financial head of a family.

In 2009, in In re Garst, Judge Venters in Kansas City examined the statute and concluded that the wage exemption would apply to funds on deposit in a bank account, if they could be traced to personal earnings.  This was because the statute used the term “paid or payable” which is identical to Social Security protections – and generally interpreted to mean that the protection follows the money.

But in 2010, Judge Surratt-States in Eastern Missouri declined to follow the Garst logic, she concluded that the wage protection statute was not an exemption at all, in light of  Benn.  In Parsons (unrelated to the prior circuit case) the court disregarded the pre-Benn decisions applying the  wage statute as an exemption in bankruptcy because Benn entitles the individual to only those statutory enactments which explicitly state they are intended as exemptions.

In effect, Parsons puts every Missouri exemption — even if applied as an exemption for many years and supported by prior case law — to a challenge now.   It concludes there is a federally-mandated definition of “exemption” for bankruptcy purposes.  The origin of this federal mandate appears to be federal common law, not the Bankruptcy Code itself.

The potential here is that many long-accepted Missouri exemptions would seem to be “in play”  in light of the Nathan Smith and Parsons application of Benn.

One other common exemption has also been stuck down by some judges under the same theories described in this series — but this has also provoked the beginnings of a re-examination as well, as we shall see in the next installment.

In the previous installment, we discussed the 8th Circuit’s Benn decision which began a sea change in Missouri bankruptcy exemptions.

To see how Benn‘s unusual opinion created  uncertainty in Missouri bankruptcies, one need look no further than our state teacher pension plans.  Prior to 2010, almost no one seriously imagined a state employee’s pension plan would be unprotected in bankruptcy.  Well-established pensions are like battleships, with layer after layer of armor protecting them from creditors typically.  And no single attack can get through.

In Missouri the pension plan law itself provides protection:

Neither the funds belonging to the retirement system nor any benefit accrued or accruing to any person…shall be subject to execution, garnishment, attachment or any other process whatsoever, nor shall they be assignable….  (169.090 RSMo.)

Yet Bankruptcy Judge Arthur Federman of the Western District of Missouri applied Benn and found Missouri’s laws wanting.  He reasoned Benn‘s reading of the Bankruptcy Code command that the state’s lawmakers use precise language — “magic words” in lawyer parlance — in order for a law to be an exemption in bankruptcy cases.

Benn said:

“Exemption” is a term of art in bankruptcy, and we agree with the dissenting judge of the BAP that “[w]hile exemption may mean different things in different contexts, in the context of Sec. 522, it refers to laws enacted by the legislative branch which explicitly identify property [that] judgment-debtors can keep away from creditors for reasons of public policy. (Benn at 814)

It is interesting to note however that the Bankruptcy Code itself does not actually define the word “exemption” but only defines how (and from what sources of law) a debtor may “exempt” property from the estate.

Judge Federman’s In re Nathan Smith opinion argues that the legislature enacted specific exemption laws for other pension plans but the teacher pension at issue did not use the magic word “exempt.”  And further the judge could find no legislative history to indicate the Missouri General Assembly intended to protect the pensions in bankruptcy cases.  (The lack of evidence is not surprising as the Missouri legislature does not maintain legislative history, though.)

Before any Missouri teacher panics, even Judge Federman acknowledges in a final footnote that there are other means than the statute at issue to preserve the pension in bankruptcy.  But he did expand on the dictum in the Benn decision and conclude that Missouri in fact does have a separate system of protections for consumers, inside or outside of bankruptcy, because the 8th Circuit “was quite clear that, in order to create an exemption in bankruptcy, the Missouri legislature must use that word [exemption].”

So prior to Benn, the laws of exemptions had generally been interpreted expansively to benefit the debtor because bankruptcy is considered a remedial process to help debtors obtain a fresh start. Indeed, prior to Benn, this same statute had been upheld as a bankruptcy exemption in In re Olson, 108 B.R. 232 (Bankr.W.D.Mo. 1989).  Indeed, the ruling seems to presuppose that the pension plan was even property of the estate, which seems unlikely under the Supreme Court’s 1992 Patterson v. Shumate decision.

Yet after Benn, the law of exemption became a narrowly-defined process.  In the next installment, we’ll discuss other issues created and then how things may recover in the future.

Sometimes a  strategy causes more harm than good.  Many long-accepted Missouri bankruptcy exemptions have become uncertain or been lost due to one such case.  This is the story of how one strategy blew up to create dangerous  uncertainty for consumers.

Bankruptcy exemptions dictate what stuff is protected from a bankruptcy trustee.  As allowed by federal law, Missouri has “opted out” and require debtors to use only its bankruptcy exemptions when they file.

In most places, the “opt out” is a simple law.  And Missouri’s “opt out” simply says a debtor can protect “any property that is exempt from attachment and execution under the law of the state of Missouri…”

This language seems simple and caused no trouble for over 25 years when it came to Missouri bankruptcy exemptions.  But some felt that “exempt from attachment and execution” meant any property that could not be attacked via the exact technical process of “attachment and execution.”

Specifically, income tax refunds not yet received because a creditor cannot “attach” a tax refund in Missouri — even though some creditors could get at them in other ways.

The reading, if it prevailed, would benefit consumers when determining their bankruptcy exemptions.  But the strategy would allow attorneys to file cases in Missouri without any concern about large tax refunds coming in soon.  That in turn would streamline bankruptcy practice and avoid a major exemption issue we all deal with each Winter and Spring.

It would also take a regular source of assets away, frustrating bankruptcy trustees and creditors alike.

Ultimately the question reached the federal Eighth Circuit Court of Appeals in In re Benn in 2007.  The circuit concluded that the bankruptcy exemptions could not be used to protect tax refunds under the “opt out” law, Sec. 513.427 RSMo.

In essence, the circuit reasoned that the words “from attachment and execution” should not be read separately from the word “exemption.”  Reading it as a whole, it implied that the “opt out” law requires a separate Missouri law that would protect the property.  Essentially, “exempt” was crucial while “attachment and execution” was not.

This was actually the prevailing wisdom concerning bankruptcy exemptions.  Unfortunately, the Benn court went on to reach additional conclusions — which seems to be dicta — that played havoc in consumer Missouri bankruptcy cases ever since.  It is not clear the implications of the additional Benn comments were intended, though.  For example, Benn says

[The opt out law] does not create an exemption for tax refunds, and no other Missouri statute or non-bankruptcy federal exemption statute permits a debtor to exempt tax refunds from the bankruptcy estate.

Missouri does provide “wildcards” (e.g. 513.430.1(3) RSMo.) which are bankruptcy exemptions for any property the consumer chooses and has always been allowed for refunds.  Yet a literal reading of this Benn dictum means the Missouri wildcards have been struck down (at least as used for refunds).

It’s clear Benn did not really intend to disallow exemption wildcards.  And no bankruptcy court has so ruled as yet.  But a strict obedience to every phrase in Benn would result in no exemption for any tax refund in the future.  And some courts have gone some way down this road in following other Benn dicta, as we will see in the next installment.

Image credit:  Thomas Hawk

Bankruptcy might be able to help you get a car back that has been picked up by the Sheriff to sell to pay on a judgment claim, but it would be better not to wait until you see your car (or other property) being taken away to call a lawyer.  You might be able to do something to save it, but your options and time are limited.

“Hello, do you represent people in bankruptcy?  Could it help get back a car from the Sheriff who took it because of a credit card?

That was the point of the call I just got from a shocked person who had just watched the Sheriff take away a car, and from those few words I knew that someone

1) had not paid a credit card

2) had not made arrangements with the creditor

3) had [probably] ignored a lawsuit

4) had [most likely] ignored a notice to claim exemptions which would [likely] have protected the car from this creditor and

5) had never consulted a lawyer or at least investigated on the internet what happens when you ignore a judgment.

Many people think that credit cards can’t hurt them or affect their property, but once someone is sued and the creditor gets a judgment, all property from cars, personal property and even homes can be taken if the borrower doesn’t take action to protect themselves.

This debtor has to see someone NOW.  If bankruptcy can help, doing everything needed to file for emergency bankruptcy at the last minute can be difficult.   Bankruptcy can be filed within 24 hours, but it isn’t easy.   It just isn’t something that you want to be forced to rush into.

You might not be able to find  a lawyer to take your case at the last minute, it might be hard to pay your bankruptcy lawyer, or you might not be able to get the information needed to prepare your documents on such short notice.  Not only do you have to find a lawyer who has an open appointment to see you right away, but paperwork which is complicated  has to be prepared.

It can be unnerving to rush through a legal process without time to digest the implications of the process. Your choice of lawyers will be limited to those who can see you right away.  While you may be able to find a good lawyer at the last minute,  many experienced attorneys are booked days or weeks in advance.  If you find yourself facing an emergency situation, try to find a good experienced attorney but better yet, don’t wait until you are up against a wall to deal with financial problems.

Yes, in some circumstances a credit card creditor can have your property, your car or your house sold.  Don’t ignore lawsuits or you may find yourself watching your car being taken away because you didn’t pay a credit card, medical bill or other debt.

In July, 2007, Florida’s legislature created a $4,000 wildcard personal property exemption for people who do not receive benefits of a homestead exemption that has become a prime example of the Law of Unintended Consequences.

During the real estate heyday on Florida (Circa 2005), there was a great disparity between homeowners and home renters when it came to protecting assets.  Florida’s homestead exemption is unlimited, and homeowners were protecting hundreds of thousands of equity from bankruptcy creditors while renters got only a $1,000 personal property exemption.

The $1,000 personal property exemption has been in place since the late 1800s, and given the time value of money, it is only worth about $70 today.  Another way to look at it is that, in today’s economy, a Floridian would need $20,000 to buy the assets that could be purchased for $1,000 back when the original exemption was written into law.

Therefore, it was high time to update Florida exemptions, especially for non-homeowners.  The wildcard exemption states that, if a person does not “claim or receive the benefit of” Florida’s homestead exemption, that individual can claim an additional $4000 personal property exemption, meaning married couples can claim a total of $8,000 of asset protection.

As we all know, in the summer of 2008, the stock market crashed, largely due to the housing bubble, and Florida’s real estate market has been in free fall ever since.  All those equity-rich Florida homeowners disappeared overnight, making the homestead exemption about as worthless as a parenting book penned by Charlie Sheen.

So, much to the dismay of bankruptcy trustees, debtors filing bankruptcy stopped “claiming the benefit of” the homestead exemption, even though they still lived in their home.  Well, this has really upset those Chapter 7 trustees who make money as glorified debt collectors.  More specifically, a Chapter 7 trustee keeps 25% of whatever he or she collects from the debtor in “non-exempt assets.”  The remaining 75% is paid out to creditors in the bankruptcy case.

If a married couple living in their home files a bankruptcy but they claim the wildcard instead of the homestead exemption, the trustee loses $2,000 in fees.  The trustees have furiously defended their right to make a living off the backs of broke Floridians by litigating petty issues surrounding when, where and how a debtor can claim the wildcard if he owns a home.

After much litigation, hand wringing and teeth gnashing, the Supreme Court of Florida finally put the issue to rest last month when it issued its decision in Osborne v. Dumoulin, — So. 3d –, 2011 WL 320986 (Fla. 2011).  In the Osbourne decision, Chief Justice Canady explains that a bankruptcy debtor need not do anything affirmative to not claim or receive the benefit of the homestead exemption.  Therefore, a homeowner can choose the $4000 wildcard exemption if it provides a greater protection than the homestead exemption would.  Actual abandonment of the home is not necessary.

HOWEVER, the Court states, “When the debtor in bankruptcy does not claim the homestead exemption, the debtor effectively surrenders the homestead to the trustee for administration.”  This is key, because bankruptcy trustees are already threatening to kick debtors out of their homes by claiming there is a benefit to the bankruptcy estate in doing so.  In reality, this maneuver is merely designed to extort $4000  - $8000 from debtors already losing their homes by making them leave a couple months early.

Therefore, the next battleground on this issue is whether the trustee can force a debtor to turn his house over to the bankruptcy estate when there is no equity and, therefore, no benefit to the estate or creditors?

One trustee has told me that he intends to offer to sell a quitclaim deed to the property to the debtor’s mortgage holder.  At first blush, that sounds like a great idea for a mortgage holder because of all the problems facing these guys in state court when they attempt to foreclose.  However, given all of the potential title issues involved, I seriously doubt the mortgage holder would bite, but you never know . . .

A list of Florida’s exemptions can be found here.

As explained by Professor Daniel Austin of the Northeastern University School of Law in Boston, Mass. in the December/January 2011 American Bankruptcy Institute Journal, the U. S. Constitution in Article 1,  the Bankruptcy Clause,  authorized Congress to establish uniform laws regarding bankruptcy throughout the United States.   However, as Prof. Austin acknowledges, the reality is far from uniform.  Each state has their own state laws which impact bankruptcy as well as variations on how the particular state’s bankruptcy courts or appellate courts interpret bankruptcy law.  Also, each federal district court has the ability to implement local rules which also affect how bankruptcies are administered.   And as each state has attempted to “interpret” the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 over the past five years, the states are even more divided on how bankruptcies are administered as explained by my colleague, Susanne Robicsek from North Carolina.

For example, states can elect to use the federal bankruptcy exemption laws or other non-bankruptcy exemptions available* or the state may elect to use the state’s bankruptcy exemption laws or non-bankruptcy exemption laws (or both).  In Oregon, for example, the state has elected not to use the federal bankruptcy exemptions, but instead to use the state’s non-bankruptcy exemption laws.   In Oregon, the homestead exemption was recently increased to $40,000 for a single debtor and $50,000 for married debtors filing a joint bankruptcy case, as recently discussed by Kent Anderson, my Oregon colleague.     However, in Florida and Arkansas, also states who have elected not to use the federal exemptions, the homestead exemption is unlimited.   In California, Cathy Moran, California bankruptcy attorney, explains the state has both bankruptcy and non-bankruptcy exemptions, with differing amounts available for a debtor (the debtor must choose one set of exemptions and use only the one set).  One set of the California exemptions  has a much higher homestead exemption if the debtor is 65 or older.

As further explained by Professor Austin, judicial interpretation can make a huge difference in how a bankruptcy case proceeds.   Some states have interpreted the 2005 Bankruptcy Act to mean that an “above median income” debtor who files a chapter 13 must file a 60-month plan, while others look at the results of the new form which calculates “disposable monthly income” and the decision of the plan length is purely based on the results of that calculation.

Due to the non-uniformity of the bankruptcy laws, Congress attempted to prevent a debtor from moving to a state with better exemptions with the passage of the Bankruptcy Abuse Prevention and  Consumer Protection Act of 2005.  That 2005 Act introduced a new requirement under 11 USC 522 for all debtors–that a debtor may not use the exemptions of the state in which they live, unless the debtor has resided in that state for 730 days, as explained by my colleague, Nicholas Ortiz.   While the new provision was designed to prevent abuse, I have found that in my practice, that this new provision has assisted debtors to keep property that they would lose under Oregon exemption law.    For example, in the last four years, I have had debtors keep a fully paid for home as they had to use California exemptions and were over age 65 while in Oregon, they would have been limited to $50,000.   Another debtor was able to retain over $20,000 in personal property under the federal exemptions that Oregon law would have required to be sold by the Trustee if it had been valued more than $400.

Professor Austin concludes his lengthy report by concluding there is nothing uniform about the uniform law.

* Examples of Federal Non-Bankruptcy Exemptions are: 

Retirement Benefits
5 USC. §8346 - Civil Service employees
22 USC. §4060 - Foreign service employees
10 USC. §1440 - Military service employees
45 USC.§.231m - Railroad workers
42 USC. §407 - Social Security benefits
38 USC.§3101 - Veteran's benefits
Survivor's Benefits
10 USC. §1450 - Military service.
28 USC. §376 - Judges, U.S. court directors, judicial center directors, and U.S. Supreme Court Chief Justice's administrative assistants.
33 USC. §775 - Lighthouse workers
Death and Disability Benefits
5 USC. §8130 - U.S. Government employees
33 USC. §916 - Longshoremen, harbor workers
42 USC. §1717 - Military service
Misc.
10 USC. §1035 - Military deposits to savings accounts (while on permanent duty outside the U.S.).
15 USC. §1673 - 75% of earned but unpaid wages or 30 times the federal minimum hourly wage; the greater of these two. (Judge may approve more)
25 USC. §410 - Indian lands or homestead sales or lease proceeds.
25 USC. §543 & 545 - Klamath Indians tribe benefits
38 USC. §1970(g) - Military group life insurance
45 USC. §352(e) - Railroad workers' unemployment
46 USC. §11110 - Seamen's clothing
46 USC. §11109 - Seamen's wages (while on a voyage and pursuant to a written contract)

 Laws, like sausages, cease to inspire respect in proportion as we know how they are made.  John Godfrey Saxe, Daily Cleveland Herald (29 March 1869).[1]

Previously, I have outlined the exemptions available to Virginia debtors in bankruptcy – property that a debtor gets to keep from the trustee.  They are, to say the least, not very generous.  Virginia has no true homestead exemption - there is no protection from creditors for a debtor’s house – and in most cases, it has been over 20 years since the dollar amounts of the exemptions have changed.  Over that time, inflation has greatly eroded the value of the exemptions to which a debtor is entitled.

Emboldened by the recent success of a similar effort in New York, a group of Virginia consumers and consumer bankruptcy lawyers launched an effort to update Virginia’s exemptions.  We drafted a bill that would create a modest homestead exemption, increase some of the dollar amounts of the other exemptions to keep up with inflation, and protect the Earned Income Tax Credit and Child Tax Credit, “refundable credits” which are really government support for low-income families.  It also would eliminate some procedural traps such as the requirement to file a so-called “homestead deed,” even in bankruptcy, to claim the only exemption available to protect cash, tax refunds, and real estate.  Our bill was introduced by a bi-partisan group of legislators: Senator Chap Petersen (D), and Delegates Mark Cole (R) and Robin Abbott (D).  So far so good…

Then the legislative session started, and our bill was assigned to a subcommittee in each house.  And out came the professional lobbyists.  Lobbyists for the bankers.  Lobbyists for the landlords.  Lobbyists for the collection lawyers.  Lobbyists who know all of the legislators, contribute to their campaigns, and know how to work the system.  By the time we showed up for the hearings on our bill, they had obtained the commitment of powerful legislators to kill the bill, except for two things: guns and cars.

In Virginia, guns are sacrosanct, and it seemed to surprise people that a gun for household use is not among the available exemptions.   And the argument that a $2000 car is just not safe or reliable enough to get a person to and from work seemed to be persuasive, even to the banksters (who make car loans, after all).  But it did not matter that the 1867 Virginia Constitution established a $2000 homestead exemption — an exemption that “has served one major purpose since its inception, to protect debtors and their families from homelessness and destitution during bankruptcy”[2] – that would be worth $29,000 in today’s dollars.  It did not matter that the $5000 wildcard “homestead” exemption has not been increased since 1977 and now has little use in protecting a home.   It did not matter that they approved up to $3000 for a gun to defend your home, but nothing for the home itself.  The lobbyists and campaign contributors had killed this opportunity to help protect Virginians from losing their homes.  

So the bill that has now passed the House of Delegates provides for a $3000 exemption for a gun, and increases from $2000 to $6000 the exemption for a car.  We are optimistic that it will pass the Senate and be signed by the Governor. That will be an improvement, and we are glad we could accomplish that.

But in this process, we learned a lot about how the system works — or doesn’t work.  The facts don’t really matter.  What matters is money – who contributes to campaigns, and who can pay the professional lobbyists.   Money that bankrupt Debtors don’t have.  What matters is access behind the scenes – not testimony at legislative hearings.  What matters is getting our voice, and the voices of those struggling with debt, heard in a way the legislators understand.  

There is an election this year.  And there is a legislative session next year.  We will be back.  We have learned.  It’s not pretty watching sausage being made.   But if you do it right, the results can be worthwhile. 

[2] In re Stewart, 360 B.R. 132 (Bankr. E.D. Va. 2006)

Gov. David Paterson has signed a bill that gives more protection to New Yorkers who file bankruptcy or who have been sued by bill collectors. The new law increases the exemptions that people can use to protect their property from forced sales by bankruptcy trustees and debt collectors. It also allows a choice between State and Federal exemptions in bankruptcy cases filed in New York State.  Consumer lawyers don’t get much to cheer about, but this new law will allow many more financially strapped New Yorkers to get the debt relief they need.

2011 will likely see a large increase in the number of New Yorkers who are forced to file for bankruptcy. This is because of the slowness of the “economic recovery” and now because they will be able to protect more assets while they are eliminating their debts.

Debtors can now protect up to $4,000 in their vehicle (up from $2400), $10,000 if the vehicle is equipped for people with disabilities. New York homeowners can now exempt $75,000 each of equity in their home (up from $50,000) in upstate areas like Binghamton, Syracuse, Rochester, and Buffalo. The homestead exemption goes up to $100,000 in the Hudson Valley, and as much as $150,000 in the New York City area and Long Island.

NY Public Interest Research Group’s legislative counsel said “In approving an update to New York’s out-of-date bankruptcy and debtor protection laws, the Governor has stood with average consumers and stood up to the banks and credit card companies who drove the economy into the ditch.”

In his bill signing statement, the Governor said, “During this time of economic crisis, it is our responsibility as public servants to protect those who are struggling the most. A reconsideration of the current exemptions, which in some cases have not been changed in decades, is particularly warranted when an increasing number of individuals find themselves in dire financial condition.”

The purpose of such exemptions is to permit debtors in bankruptcy to retain a modest amount of personal property and equity in their homes so that they can continue to maintain their lives, and to protect them from becoming homeless, unemployed, or otherwise dependent on the State.

The exemption increases will allow more people to file for Chapter 7, and will allow many of those filing Chapter 13 to pay less to their Chapter 13 trustee.

Unusual situations often show up in bankruptcy court eventually.  And sometimes they contain both humor and depression in equal measure.

Recently the 8th Circuit Bankruptcy Appellate Panel was called upon to rule on whether a horse trailer could be a mobile home under Missouri law.  The issue arose because the debtor who filed bankruptcy owned a small $3,000 trailer designed for hauling horses which he also happened to sleep in occasionally.  But for the generosity of friends and his girlfriend, this would be his only home.

Under Missouri law, a debtor can exempt — protect — up to $5,000 for a mobile home used as a residence (under some circumstances).  But there is virtually no protection for an unmotorized trailer.  So the court was called on to determine whether he could protect his sometime-abode from the clutches of his Chapter 7 trustee, collecting assets for his creditors.

Sadly for the debtor, the BAP concluded he could not.  The BAP relied on a relatively narrow definition in Missouri law for “Manufactured Homes (Mobile Homes)” to reason that the (equally narrow) horse trailer failed to meet the definition.  Granted, it took seven pages to reach this conclusion (although it would probably take me 12 pages to say the same thing) but the conclusion seems well-founded if terribly unfortunate.

In this holiday season, it’s nice to read a few cases that bring a chuckle to the lips.  And to hope we never are so down on our luck as to rely on a horse trailer as the only roof over our heads — or to have a Chapter 7 trustee trying to take it from us.  And let us spare a moment to consider those who may be in even worse shape.

Speaking of which, the Salvation Army’s Kettle is still not yet full.  Every dollar helps.

Case Note:  Moon v. Hurd (In re Hurd), #10-6072 (8th BAP 12/15/10)

You can use your state exemptions to protect assets.  If your state law permits, you can choose to use federal exemptions instead.  Can you use both?

The Massachusetts homestead will protect $500,000 of home equity.  It protects your family, not just you.  For example, your ownership interest is protected if your children reside in the home even if you got divorced and moved away.  In re Thompson, 2008 Bankr. LEXIS 1199 (2008) (Boroff, J.) (contra In re Cassese, 286 B.R. 472 (2002) (Rosenthal, J.) (resident children not addressed)).  Your ownership interest is protected by your spouse’s homestead.  In re Farrenkopf, 3054 B.R. 382 (2004).   Your ownership interest is protected by your parents’ homestead if you live in the home jointly owned with your parents.  In re Vasques, 337 B.R. 255.   (Because you and your parents are one family unit, you are not allowed to file separate homesteads for the same home that you all live in even if you are an adult.)  Got this so far?

Let’s expand.  Your homestead protection would be reduced from $500,000 to $146,000 if you moved to your current state and acquired your home within 3 1/2 years before filing bankruptcy.  (It’s the law, man.  You’re not allowed to move to a homestead-generous state and quickly file.)  But your spouse’s ownership interest is protected to the full $500,000 even if the two of you moved and filed within 1,215 days.  In re Walsh, 359 B.R. 389 (2007).   All because the Massachusetts homestead protects your family, and not just you. 

“Logic compels” (I just love that phrase) the next step, that you can use the federal protections in Massachusetts while relying on your family’s homestead to protect your home.  No case goes this far (the debtor in Walsh used the state exemptions) so I cannot promise this outcome.  The facts of an earlier case, In re Robbins, 187 B.R. 400 (1995), show that the debtor did precisely this but the decision was limited to a rejection of a post-petition election of a statutory Tenancy by Entireties election.

WARNING:  The Massachusetts legislature just passed a new homestead law which has not yet been signed by Governor Patrick.  I’ll report on this in detail if it gets signed.