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Homestead exemption was inapplicable after debtor rented out home

Chapter 7 bankruptcy can afford a debtor a fresh start, and even though it is often called "liquidation" bankruptcy, it may still be possible to protect some of your assets. In particular, a "homestead exemption," protecting some of the value of your home, may be of aid.

However, a debtor in distress should seek counsel to ensure that any actions taken do not adversely impact his or her Chapter 7 bankruptcy, as exemplified by the recent United States Bankruptcy Court case of In re Taliercio.

Home rented out due to financial stress

The debtor owned a three-story residence in Norwalk, Connecticut. Prior to January of 2011, the debtor's family resided in the property as their primary residence. However, from January 9, 2011, through January 31, 2012, the debtor agreed to rent the property to a third party under a residential lease. Later, a bank commenced a foreclosure action against the property and just before the foreclosure sale date, the debtor commenced a Chapter 7 bankruptcy case.

The debtor filed to claim a homestead exemption under Connecticut state law. The bankruptcy trustee-the party tasked with administering the bankruptcy proceedings-objected to this homestead exemption.

Did the debtors "occupy" the residence?

In reviewing the case, the United States Bankruptcy Court noted that among the requirements for the homestead exemption, an individual claiming the exemption must "occupy" the subject real property.

The debtor argued that the word "occupy" should be broadly construed. He claimed his family was only temporarily not occupying the property, that the lease to the third parties was only for one year, and he intended to move back when the lease expired. The debtor testified that he temporarily rented the property because the family was experiencing financial problems, but he reserved the right to go in and out any time he wished since he stored personal property there. He further claimed that he was frequently at the property to maintain the grounds.

The court stated that there was little doubt that the debtor, like countless others, was the victim of a weakened economy and that he was doubtless an honest, hard-working man, trying to take care of his family. Indeed, per the court, he was the kind of individual the Bankruptcy Code and policy were intended to assist by providing him with an economic fresh start.

Unfortunately, the argument that "occupy" could be construed to include an "intention to occupy" nullified the essence of a homestead. By the debtor's logic, the property could be his family's homestead even though he had given up the right to use it as a home eight months before he filed the Chapter 7 bankruptcy. Even according to the debtor's own bankruptcy petition, the debtor's street address was listed as another address; a property owned by the debtor's mother-in-law.

Accordingly, the debtor did not occupy the property when he filed for bankruptcy protection, and the homestead exemption did not apply.

Selecting the best option for your situation

To successfully utilize the protections offered by bankruptcy law, you should consult an experienced attorney prior to taking any action. It is crucial that you seek representation from someone who can help you understand the risks and benefits of each option and identify the strategy that can best protect your assets, minimize your risks and achieve your financial goals.

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