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Panel Rules Debtor Cannot Claim Homestead Exemption in Abandoned Property - Paul v. Allred

March 11, 2013

Vincent Howard and our San Bernardino consumer bankruptcy lawyers were interested to see a recent case about a claimed homestead exemption that the court declined to permit. In Paul v. Allred, William Paul, Jr. filed for Chapter 7 bankruptcy citing one address as his home, but attempted to claim a homestead exemption for a property at another address. The Chapter 7 trustee, Allred, objected to this, saying it was a rental property where Paul did not live, which meant it didn't meet the requirements of the South Dakota homestead exemption. Paul disagreed on this interpretation of South Dakota law, but the bankruptcy court sided with the trustee. The Bankruptcy Appellate Panel for the Eighth U.S. Circuit Court of Appeals ultimately agreed.

Paul and Allred agree on the facts of the case: Paul lives with his family in a house on Billings Avenue in Lead, SD. The home in which he claimed the homestead exemption is on Spark Street in Lead. At a meeting of creditors, Paul testified that he has owned the Spark Street property since 1997 or 1998, but hasn't lived there for 14 or 15 years and has no intention of moving in. Instead, he was renting it out and making rental income. He owns interests in no other real estate; the Billings Avenue home belongs to his wife. Allred, the trustee, argued that South Dakota law requires that homestead exemptions can be claimed only if the debtor is living in the property, or intends to live there, on the date of filing. Paul disagreed on the law and that he had "abandoned" the property. After both sides declined to file further materials, the bankruptcy court ruled for Allred, denying the exemption.

The Bankruptcy Appellate Panel started its analysis with the South Dakota homestead exemption at issue. It is exempt as long as it "continues to possess the character of a homestead," meaning it's occupied by the debtor or the debtor intends to occupy it. The panel pointed to a South Dakota Supreme Court case that expressly said a homestead is abandoned if the owner leaves it with no intention to return. That case, Yellowhair v. Pratt, said that a mere possible or probable return, contingent on some specific event, is not enough to defeat abandonment. Indeed, it even specified that remarrying and moving into the new spouse's home--precisely what happened with Paul--would constitute abandonment. Thus, the panel upheld the finding of abandonment. Paul argued that this deprives him of his rights under South Dakota law, but all of these laws refer to "homesteads," the panel noted.

Vincent Howard and our Santa Ana personal bankruptcy attorneys believe this is a good example of why bankruptcy planning is important. Of course, we never advise clients to hide assets or otherwise defraud the court--which often hurts the debtor more in the long run--but smart bankruptcy planning can often help debtors avoid losing assets they want to keep. For example, if the circumstances are right, Paul could file for Chapter 13 bankruptcy instead of Chapter 7. This means making a long-term (usually five-year) repayment plan rather than a quick sale of assets, but the debtor might believe this is worthwhile if it means keeping the home. Vincent Howard and our Riverside County individual bankruptcy lawyers prefer to meet with clients as early as possible in the bankruptcy planning process to maximize our chances of protecting important assets.

If you are considering bankruptcy as a way to end overwhelming debt, including a mortgage that you can no longer manage, don't wait to call Howard Law, P.C. For a consultation, you can reach us online or call 1-800-872-5925 toll-free.

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