IN California, the equity in your homestead (your residence) is exempt up to a certain amount, depending on your circumstances. For instance, if you are at least 65 years old, you can exempt $175,000 of equity in your residence. So, if your house has a current fair market value of $300,000 and you have a mortgage on it with a balance of $150,000, the entire equity of $150,000 is exempt in bankruptcy. In other words, if you file for Chapter 7 relief, you can exempt your house and keep it even as you discharge a million dollars of unsecured debt. But let’s say that you own two lots which are adjacent to each other. On one lot, you have your residence. On the other lot, you have a two storey building which you use for business. In fact, on the first floor of this building you operate a restaurant that specializes in fried chicken Tahitian style. On the second floor of this building, you keep your inventory of live chickens. Last week, your wife left you because she alleges that “you chicken lover, you love your chickens more than you love me!” You are despondent because your wife has left you and it’s not even true that you love your chickens more than you love your wife. The truth is that you love your wife and your chickens equally. You abandon your residence and live in with your chickens in the second floor of the building.
A month after you move into the 2nd floor of the building, you file for Chapter 7 relief to discharge $100,000 of credit card debt. You exempt the $100,000 equity in the building alleging that you have 50 dependents who happen to have feathers instead of hair and that you claim the building as your homestead. The trustee objects to your claim of exemption because the building is your place of business, not your residence. Who is correct?
In Re Perry, the debtor owned two adjacent parcels of land. A house where the debtor once lived was located on one lot. A workshop used in the debtor’s welding business was located on the other lot. Debtor moved out of the house in September 2011. Since then, he returned to the area every two or three weeks. When he was in town, he stayed in the workshop, which had a sofa bed and refrigerator. When the debtor filed for Chapter 7 relief in March 2012, he claimed the workshop property as his exempt homestead. He abandoned the house, which was subject to liens in excess of its value. The bankruptcy court sustained the trustee’s objection to the debtor’s homestead exemption, finding that the debtor’s business homestead did not survive the abandonment of the accompanying residential homestead. While Texas allows an urban homestead to include both the debtor’s residence and his business, debtors must establish the residential nature of the property before they may claim it as their exempt homestead. Consequently, after abandoning his home, the debtor needed to prove that the workshop was used as his residence before the property could be claimed as exempt. He failed to do so. “Debtor did not, nor has he ever, resided upon Lot 152. The workshop, and by implication, the lot on which it sits, has predominantly been a place of business. The fact that Debtor continued to use the workshop after moving to Keller does not lend weight to the homestead argument. Further, the record lacks any evidence to suggest that Debtor conditioned the workshop for residential purposes or intended to do so. If anything, the record suggests that Debtor envisioned the property as a weekend home. That does not a homestead make,” the court said.
However, in our chicken example, debtor may be treated differently by the court. He needs to show that the second floor where he lives has a place to shower and a toilet, and at least a mattress where he can sleep. He has a commercial kitchen in the first floor anyway.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.