Monday, November 28, 2005

Home Equity Appreciation Not Subject to Cap

While there has already been considerable jurisprudence since BAPCPA was passed which deals with the $125,000 cap for homesteads purchased within 1,215 days of the petition date under 522(p), a recent case weighs in on whether an increase in the equity position in a homestead during the 1,215-day period is subject to the statutory cap and not exempt.

In In re Blair, __ B.R. __, 2005 WL 3108495 (Bankr.N.D. Tex. 11/21/05), the Debtors claimed an exemption for the equity in their homestead in an amount just under $700,000. The Debtors had purchased their home in 2000, outside the 1,215 lookback period, but continued to make regular mortgage payments and build equity in the property during the 1,215-day period. An unsecured creditor challenged the exemption listed for the homestead equity and asserted that the Debtors were not entitled to an uncapped exemption for the equity increase during the 1,215-day lookback period.

In relevant part, 522(p) provides that " ... a debtor may not exempt any amount of interest that was acquired by the debtor during the 1,215-day period ... that exceeeds in the aggregate $125,000 in value ..." As Judge Hale in Blair noted, the term "interest" which must be acquired by the debtor during the 1,215-day period to trigger the new homestead cap is not defined. Judge Hale held that a debtor does not actually "acquire" equity in a home, but rather acquires title to a home. Thus, the "interest" the Debtors acquired was the actual purchase of the home, which was completed well before the 1,215-day period, and not subject to the $125,000 cap.

The court found this interpretation was consistent with related subsections of 522, including the companion provision in section 522(p)(2)(B), which allows for rollover by a detbor of the equity in one home to another home located in the same state. A debtor is not subject to the homestead cap if he takes the proceeds of his first residence and reinvests them in a second residence even within the prescribed period of section 522(p). The unsecured creditor's reading of the statute would seem at odds with this provision (if debtors can reinvest proceeds of one homestead into another, why can't they simply retain the increased value of a homestead they've already bought?).

Finally, Judge Hale concluded that while the term "interest" was unambiguous, if any ambiguity required inquiry into the legislative history of 522(p), the debtors would still prevail. If the purpose of 522(p) was to prevent out of state residents from moving to certain states in order to file for bankruptcy under more advantageous state homestead exemption laws, that rationale did not apply to the debtors in this case.


Anonymous said...

What legal authority supports the proposition that interest acquired does not include capital appreciation? Seems Judge Hale decision might be easly attacked.

Frodnesor said...

I think this is going to continue being a thorny issue, perhaps even more difficult to deal with than the debate over whether the cap applies in the opt-out states.