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Debtor Not Entitled to Homestead Exemption for Proceeds of Home Split in Divorce - In re Jefferies

May 2, 2012

Vincent Howard and our Rubidoux consumer bankruptcy lawyers were interested to see a case with an unusual homestead exemption at issue. In In re Jefferies, the Bankruptcy Appellate Panel of the Ninth U.S. Circuit Court of Appeals ruled that Jack Jefferies may not exempt money received from his former homestead under Washington's homestead exemption. Jefferies received a final divorce decree in December of 2010, and the court order awarded him an "equalizing judgment" of $40,800 in exchange for his interest in the marital home, which was retained by his former wife. His Chapter 7 trustee objected to his attempt to exempt this money under the homestead exemption, and the bankruptcy court for Western Washington sided with the trustee. On appeal, the BAP of the Ninth Circuit affirmed.

Jefferies moved out of the marital home in 2009 and was granted a divorce in December of 2010. In his March 2011 bankruptcy petition, he claimed $47,000 as "proceeds of sale of homestead" under Washington state bankruptcy exemptions, saying the equalizing judgment constituted sale proceeds. The trustee objected, saying Jefferies couldn't meet the qualifications of the homestead exemption because he was divested of interest in it by the divorce decree; the monetary award was not proceeds from a sale, the trustee argued. The bankruptcy court held a hearing and decided that while the money may have been proceeds, the transfer was not a voluntary sale. The bankruptcy court later turned down a motion to reconsider in which Jefferies pointed out that the divorce court had simply formalized a voluntary agreement he had made with his ex-wife. Jefferies appealed.

The BAP ultimately agreed, finding Jefferies had no standing to claim the homestead exemption. Washington's homestead exemption, like California's, covers the proceeds of a voluntary sale of a homestead in good faith for the purpose of acquiring a new homestead, for up to a year. Thus, there was no doubt that Jefferies would have been entitled to the exemption after a conventional sale. However, the panel found that the transfer of his interest to his ex-wife was not a voluntary sale under state law. Washington caselaw is scant, it said, but notes that a forced sale can include a decree forcing action. The panel dismissed the debtor's argument that the transfer was not forced because he'd had a voluntary pre-decree agreement with his ex-wife to transfer the property, saying an element of legal compulsion remained. It pointed out that Jefferies said the agreement did not come quickly; the state court ultimately determined the equalizing judgment's amount; and that Jefferies was disappointed by the order and considered an appeal. Thus, it upheld the district court.

Vincent Howard and our Anaheim personal bankruptcy attorneys frequently handle bankruptcy cases that happen during or after a divorce, so we have firsthand experience with how divorce can affect a client's financial judgment. For that reason, we're disappointed by the BAP's ruling. Divorce agreements rarely come quickly; they are difficult emotional decisions as well as important financial decisions that take time and research to fully understand. Thus, it seems unfair to weigh the speed of the agreement this heavily. For the same reason, we also wouldn't give substantial weight to the satisfaction Jefferies had with the order or the fact that he chose to have the court answer it; sometimes, having an impartial court decide financial issues is the fairest solution. As Norwalk individual bankruptcy lawyers, we hope to see this case, or this issue, again in the future.

Led by partner Vincent Howard, Howard Law represents clients across California who are considering bankruptcy or any kind of legal action to fight an unfair foreclosure. If you're tired of bad behavior from creditors and loan servicers and you'd like to discuss your legal options with an experienced attorney, call us today at 1-800-872-5925 or send us a message through our website.

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