Rasmussen court allows both spouses $125,000 exemptions and protects appreciation within 1,215 days of bankruptcy.

• Author: Nelson, Barry A.

Since the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), courts have interpreted the limitations that BAPCPA placed on homestead protection. With the exception of the Bankruptcy Court for the Arizona District, (1) the courts have uniformly held that, even for residents of states that have chosen to "opt out" of the federal bankruptcy exemptions, debtors may not exempt any amount of homestead property exceeding $125,000 in value if the property was acquired by the debtor during the 1,215-day period preceding the date the bankruptcy petition was filed. (2)

On September 8, 2006, in In re Rasmussen, 2006 Bankr. LEXIS 2176 (Bankr. M.D. Fla. 2006), the Bankruptcy Court for the Middle District of Florida followed the line of cases holding that the $125,000 exemption applies in Florida. Rasmussen, however, addressed three additional issues: 1) Do a husband and wife each benefit from the $125,000 exemption; 2) is equity derived solely from post-purchase appreciation of the homestead an interest that was acquired by the debtor during the 1,215-day prefiling period (3) if the homestead was acquired less than 1,215 days before the bankruptcy petition was filed; and 3) is equity in the homestead attributable to exempt assets used by a debtor to acquire a new homestead within the 1,215-day prefiling period, other than equity proceeds from the sale of a prior homestead within the same state, protected? (4)

Facts

The debtors in Rasmussen, who were husband and wife, bought their homestead in 2002 for approximately $350,000. Of the purchase price, $35,000 was rolled over from the husband's previous homestead, and most of the remainder was from bank financing. Before the 1,215-day prepetition period had run, the debtors filed their Ch. 7 petitions. As of the petition date, the homestead had appreciated to $750,000 and the debts secured by the homestead totaled $575,000.

"Stacking" the Exemption

The court in Rasmussen addressed whether the $125,000 exemption should be stacked for a husband and wife who are co-filers in a bankruptcy proceeding. The court reviewed Florida law and concluded that each debtor is separately entitled to the constitutional exemptions, even if the property is jointly owned. The court also relied on current bankruptcy law, including [subsection] 522(m) and 522(p) of BAPCPA, to support its conclusion that spouses filing a joint bankruptcy proceeding should be able to stack their respective $125,000 exemptions.

Qualifying its "stacking" decision, however, the court stated that [section] 522(m) of BAPCPA would not create rights that did not otherwise exist in state statutes. The court cited an Alabama law, which limits the homestead exemption to a single $2,000 for joint debtors, as an example of a state where debtors would not be able to utilize the "stacking" provisions of [section] 522(m) because of state law limitations. The court noted that Florida's unlimited homestead exemption does not contain any specific limitations on the right of either spouse to claim the homestead exemption. Based on its analysis of the Florida homestead laws and BAPCPA [section] 522(m), the court concluded that in Florida, joint debtors should be able to "stack" their exemptions for a total of $250,000. Presumably, the court's rationale would also be applicable in states like Florida that do not specifically limit the homestead exemption in the case of joint owners.

Can Creditors Reach Homestead Appreciation Earned During the 1,215-day Prefiling Period?

The bankruptcy trustee in Rasmussen contended the interest in homestead that the debtor acquired during the 1,215-day prefiling period included post-acquisition appreciation. In ruling against the bankruptcy trustee, the court relied on BAPCPA [section] 522 (p)(1), which states "a debtor may not exempt any amount of interest that was acquired by the debtor during the 1,215-day period ... that exceeds in the aggregate $125,000." (5) The court noted that there were two prior cases interpreting whether appreciation during the 1,215-day prefiling period is considered to be an "interest acquired" if the homestead was acquired more than 1,215 days before the petition was filed. (6) Following the reasoning of those cases, the Rasmussen court concluded that the phrase "interest acquired by the debtor" implies more than a passive acquisition of market appreciation. Instead, the court noted, the concept of an "interest acquired by the debtor" implies an active acquisition...