What Amount Of Equity Is Protected In A Debtor’s Recently Purchased Homestead?

This question was recently answered by the United States Bankruptcy Court for the Western District of Texas in a decision by Judge Frank Monroe entitled In re Fehmel , Case No. 07-60831 (Bankr. W.D. Tex 5/22/08).

Texas is a state that tries to protect all of the equity of a home of a person or family within the State of Texas.  However, when Congress and the President changed the bankruptcy laws in 2005, they were concerned with rich people moving to Texas, or a few other states like Florida, with the plan to buy a new home to protect their cash.  As a result, the new law provides that in states like Texas, where the value of the equity in a family’s home is fully protected regardless of the amount, the law says that the amount of equity a family may protect is limited for the first 1,215 days, and then Texas laws applies to protect the full amount of the equity in a family’s home beginning on the 1,216th day.

In Fehmel, the Debtors owned a homestead which was purchased more than 1,215 days before bankruptcy. Within the 1,215 day period, they purchased a new homestead prior to selling the old one. They made the downpayment on the new homestead by drawing down on a corporate line of credit. Subsequently, they sold their old home and paid the proceeds into the corporate bank account. They made substantial improvements to the new homestead property, renovating the main house and adding a barn, a workshop and a guest house. At the time that they purchased the new homestead, the Debtor’s company was doing well. However, subsequent reverses put the company out of business and caused the Debtors to file bankruptcy. At the time that they filed bankruptcy, the new homestead was worth almost double what they had paid for it.

The bank that held a judgment as to the corporate debt challenged the amount of equity the Debtors (man and wife) could protect given that they did not own the home more than 1,215 days.  The bank also challenged other issues, which are not important here.  The bank stated that the Debtors could not protect more than $125,000 in equity in the home.  The Debtors argued that they were entitled to that amount for each debtor (or for both the man and wife).

The Court released its opinion on May 22, 2008, finding that the Debtors’ exemption was limited to a total of $273,750 in equity.  The Court noted that while the parties had relied on the amount of $125,000 contained in the original version of law that amended the bankruptcy laws, that the cap had been adjusted to $136,875 in April 2007. The Court found that the cap should be applied on a per debtor basis because 11 U.S.C. § 522(m) states that the limitations contained in that provision are to be applied per debtor in a joint case. As a result, the homestead cap was doubled.

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