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Court Finds Couple’s Payments Toward Home Improvements May Have Been Fraudulently Converted into Home Equity

A federal bankruptcy appellate panel recently issued a decision addressing whether payments made toward improvements on a home were exempt in a chapter 7 bankruptcy claim. The appellate court determined the payments made toward improvements may have been non-exempt if they were intended to defraud creditors, and the debtors’ equity should be reduced accordingly.

ToolsDebtors Made Improvements on Home Paid Through Family Members’ Bank Accounts

A husband and wife made several improvements on their home over a period of time. Their daughter opened a checking account at a bank at the time, and her parents made large deposits into the account and paid for some improvements on the home, totaling almost $50,000. Improvements were also funded by other family members.

Soon afterward, the parents filed a petition for relief under chapter 7 of the bankruptcy code. They valued their home at $200,000 and listed that they had a remaining mortgage on the home of $133,725. Thus, the debtors argued the equity in their home was $66,275, and this amount was exempt under the state’s homestead exception. The trustee objected, claiming the money that had been transferred through their daughter’s account did not qualify under the homestead exemption under 11 U.S.C. Section 522(o) because the husband and wife had transferred the money into the property to hinder, delay, or defraud creditors.

The Homestead Exemption in Bankruptcy

The homestead exemption may protect an individual’s home from creditors in a chapter 7 bankruptcy proceeding. Under the exemption, the equity in a debtor’s home may qualify as exempt and be protected from creditors, meaning that their house cannot be taken away. However, the amount of equity that qualifies as exempt varies from state to state.

A party objecting to a debtor’s claimed homestead objection can prove some or all of the exempted value is not exempt if:  1) the debtor disposed of the property within the previous 10 years; 2) the property disposed of was non-exempt; 3) some of the proceeds from the sale were used to buy a new homestead, improve an existing homestead, or reduce debt on an existing homestead; and 4) the debtor intended to hinder, delay, or defraud a creditor.

Appellate Panel Orders Bankruptcy Court to Determine the Difference

In this case, the trustee argued that the elements were met and that the exemption should be reduced by the money paid toward the improvements. The appellate court determined the bankruptcy court was required to reduce the value of the couple’s interest to the extent it is attributable to fraudulently converted increased equity in the homestead under Section 522(o). However, the appellate panel noted a court has to determine the value of the debtor’s interest in the homestead as well as the value of the debtor’s interest in the homestead without the improvements. Generally, the difference in value will be the value that is attributable to the improvements. Then, the value of the debtor’s interest in the homestead will be reduced by that amount. The appellate panel ordered the bankruptcy court to make the determinations in this case on the difference in value based on evidence from the parties.

Contacting a Bankruptcy Lawyer

If you feel like your life is being controlled by your debt, you may have the option of filing for one of several forms of bankruptcy. At Kruger & Schwartz, helping individuals and families in Kentucky and Indiana face their financial challenges and find resolutions is what we do best. No matter where you are in the debt relief process, the lawyers at Kruger & Schwartz can help. We have over 30 years of experience helping clients take the proactive steps necessary to stop wage garnishment and protect their vehicle from repossession by filing for bankruptcy. To schedule your free initial consultation, call us toll-free at 866-366-3328 or send us an email online.

More Blog Posts:

Appeals Panel Upholds Dismissal of Pro Se Debtor’s Bankruptcy Case, Kentucky Bankruptcy Lawyers Blog, published December 2, 2016.

Appellate Panel Reverses Bankruptcy Court Ruling that Had Refused to Reopen Debtor’s Bankruptcy, Kentucky Bankruptcy Lawyers Blog, published December 28, 2016.

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