Homestead Exemption and Married Spouses

It is not uncommon for one spouse to seek bankruptcy relief under Chapter 7 or Chapter 13 of the Bankruptcy Code in a situation where title to the real property is held in both parties’ names. Generally, under such circumstances, the debtor typically claims a half interest in the property. Thus, the homestead exemption, under either New York law or federal bankruptcy exemptions, would be used to protect that interest. This creates an interesting legal issue  since under New York’s Real Property Law both spouses hold an undivided interest in the entirety of the property. If so, does the homestead exemption have to protect all of the equity in the property? 

In In re Naples, W.D.N.Y. Bk #14-10264, the bankruptcy trustee made precisely that argument. The trustee argued that since only one of the spouses had filed bankruptcy, and since the property was held by the parties as tenants by the entirety, creating undivided interest in each spouse, the debtor did not have sufficient homestead exemption to protect his equity in the property. The bankruptcy court disagreed. It held that under those circumstances, for purposes of valuing the debtor’s interest in the property, only one half interest needs to be valued and homestead exemption would be applied only to that half interest. The court reasoned that since the way the title is held creates limitations on each spouses to transfer title without consent of the other spouse, for the bankruptcy court’s valuation, only one half interest needs to be valued.

I think that this is a well thought-out result. If both spouses were filing for bankruptcy, each spouse would be able to apply their own exemption to any equity in the property, so if only one spouse files, that spouse should only need to protect that spouse’s half interest.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

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