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Friday, December 09, 2005

Equity Increases Are Not "Acquisitions" Under New Bankruptcy Rules

Under the Florida Constitution, the homestead of an individual is generally not subject to claims of creditors of that individual. Other states also provide exemptions for homestead interests. However, under the recent revisions to the bankruptcy law, homestead interests acquired within 1215 days of a bankruptcy filing cannot receive the benefit of these state homestead protections (beyond $125,000 in protection). Generally, this is aimed at making it more difficult for debtors to acquire a protected interest to shield themselves from existing creditors.

So what happens if a homestead is acquired more than 1215 days before a bankruptcy filing, but the homestead is encumbered by a mortgage and mortgage payments (and thus equity increases) occur within the 1215 days? Are these equity payments the acquisition of a homestead interest such that they are subject to the 1215 day rule?

In a case of first impression that is favorable to debtors, a Texas bankruptcy court has held that such regular loan payments within 1215 days of filing are NOT homestead acquisitions for purposes of these rules. It remains to be seen whether other bankruptcy courts similarly interpret the law, and whether non-regular loan payments will be similarly treated.

In re: Kevin Blair and Susan Blair, US Bankruptcy Court, N.D., Texas, Dallas, No. 05-35922-HDH-7

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