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Sixth Circuit Allows Bankrupt Couple to Keep Proceeds of Home Sale - In Re Wengerd

June 27, 2011

As Corona foreclosure defense lawyers, we were interested to see an opinion from the Sixth Circuit's bankruptcy appellate panel saying that bankruptcy homestead exemptions apply when the bankruptcy is filed, even when the debtors fully intend to sell the home. That was the issue in In re Wengerd, which deals with an Ohio couple's Chapter 7 bankruptcy. The bankruptcy court for James and Cheryl Wengerd had ruled that they were not entitled to the homestead exemption under Ohio law and must turn over the proceeds from the sale of their home. They had been living off the proceeds of the sale, about $35,000.

The Wengerds filed for Chapter 7 bankruptcy in 2009. They had lived in their home since 1995 and listed $164,978 in debt on it, out of a fair market value of $205,000. Importantly, they had entered a contract to sell the home for $205,000 before filing for bankruptcy, but did not disclose that contract in their petition or in the form requiring disclosure of contracts. In fact, they said in another form that they intended to keep the home, although James Wengerd testified in a deposition that they intended to move if the sale went through. At a meeting of creditors, they testified that they had sold the home and were using some of the proceeds to move to Kansas so James Wengerd could attend divinity school.

Their trustee, Lisa Barbacci, filed an objection to the homestead exemption about three months later. In the filing, she argued that they were not entitled to it because they did not intend to stay in their Ohio home. The bankruptcy court agreed, saying debtors may not claim a homestead exemption if they plan to abandon the property directly after filing. It ordered the Wengerds to turn over the proceeds of the sale. They appealed.

The Sixth Circuit's bankruptcy appellate panel reversed. Using bankruptcy caselaw from Ohio, the Sixth Circuit and around the country, it said the right to a homestead exemption is determined according to when the bankruptcy is filed. And the language of the statute does not take into account the debtors' intent; it merely states that debtors have the right to an exemption if they live in the property on the date they file. Thus, it reversed the bankruptcy court's decision and allowed the Wengerds to keep the proceeds of their home's sale.

Our Placentia foreclosure defense attorneys are particularly interested in this decision because the Wengerds were hedging their bets -- they weren't sure whether the sale would go through. Selling a home is difficult right now -- especially in California -- and as many of our clients know, short sales can be difficult if the lender withholds its approval for many months. As a result, it's wiser to make plans for a future both with and without the sale. Filing for bankruptcy is not necessarily the right choice for everyone with a mortgage problem; it's best for people who genuinely need help controlling their debts, usually including debts other than home loans. But for people who are in that situation, our Pomona foreclosure defense lawyers believe a bankruptcy filing can be very helpful, because it gives debtors certain rights against the mortgage company and other creditors. It also gets decisions about fairness in foreclosure proceedings in front of a judge whose job is to decide cases objectively.

If you're tired of calling and calling your lender and getting no helpful response, call Howard Law PC instead to discuss your rights and your legal options. You can reach us at 1-800-872-5925 or through the Internet for a free, confidential consultation.

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