In re: Hassler, No. 11-40196-JPD (Bankr. D. Idaho., May 17, 2011).
A homestead exemption is an exemption designed to protect an individual's residence from creditors during bankruptcy, usually up to a certain value amount. When a bankruptcy petition is filed, property qualifying under state law for a homestead exemption receives protection from the date the party acquired an interest in the property - that is, the exemption relates back. But what happens when that property is subject to a judgment lien?
The debtor in this case, Kathi Hassler, purchased a piece of property with her husband, Walter Evans. Thereupon, a company recorded a certified copy of its judgment against Walter. A judgment lien is a lien against all property owned by a defendant, which is granted by court judgment.
Before they divorced, Kathi conveyed her interest in the property to Walter, and claimed in divorce proceedings that the property was not mutually theirs, or community property, but was Walter's separate property. She granted a quitclaim deed to Walter, conveying her ½ interest in the property to him. However, she later changed her mind and demanded an undivided ½ interest in the property, which she received.
Thereafter, Kathi filed for Chapter 7 bankruptcy protection, claiming a $100,000 homestead exemption in the property under Idaho law. However, the exemption does not protect homesteads from judgment liens arising prior to the homestead's establishment. Thus, the issue became whether or not the judgment lien in this case arose before Kathi's ownership of the property. If it did, the homestead exemption will not protect her from the judgment lien.
The court found that, when Kathi and Walter purchased the home and used it as their principal residence, they created a residence protected by the homestead exemption. Once the judgment lien was recorded, the home was protected from it because of that exemption. However, when Kathi gave the property to Walter prior to divorce proceedings, she gave up interest in the property, and no longer had the benefit of a homestead exemption. When the property was transferred back to Kathi, she became entitled once again to the homestead exemption, but at the same time the judgment lien attached, and she was precluded from taking the homestead exemption as protection from the judgment lien.
This case demonstrates the complexity of consumer bankruptcy law, and the necessity for effective planning regarding assets. Because Kathi transferred her interest in the home during her divorce, she lost protection over the asset. Because of this, she lost one of the most valuable tools in bankruptcy - the right to keep a qualifying residence.
