Do married people filing separate bankruptcies each get a homestead exemption?

Overview: 

When you are considering filing for bankruptcy and you are married, you must decide whether or not you and your spouse want to file together, only have one person file, or both file separately.  You have the option to file jointly, meaning all property of both spouses and all debts become property of a single bankruptcy estate. You can also file separately without your spouse or only one of you could file. Depending on your situation, one may be more beneficial than the other. 

Your marital status at the time of your bankruptcy filing can affect how much of your debt is discharged and how much property you get to keep. Today’s case summary teaches us that the marital status of the debtors at the time of filing matters. It also shows how subsequent divorce proceedings transferring property to the other spouse can not be used to create a pre-petition property interest.  

Facts of In re Vazquez 

Husband and wife were married but separated on the day they filed separate bankruptcy petitions. Each petition attempted to exempt separate residences that were located next door to each other. Before they were married, Wife agreed to buy 1621 Holland. After her marriage to Husband, Wife did not convey any interest in the house to him. After marriage, the couple purchased 1617 Holland as joint tenants and resided there. When separating, Husband moved out of 1617 and into 1621 Holland. Husband now claims 1621 as his homestead and Wife claims 1617 as her homestead exemption in their bankruptcy petitions. A divorce petition was later filed and granted after the bankruptcy petitions were filed.  

Discussion: 

A Kansas Chapter 7 debtor may exempt a homestead inside the city limits with a residence and land up to one acre from the bankruptcy estate.  The debtor must own the real estate and either the debtor or his family or both must reside there.  This generally means that the debtor must own and reside there on the date of filing.  

Ownership of real estate 

A holder of legal or equitable title is required to meet the ownership requirement in Kansas. This does not include possessory interests of a tenant. In the Vazquez case, Wife held legal interest in 1617 Holland and was allowed to exempt it in her bankruptcy case. Husband unfortunately did not have legal title to the 1621 property because there was never conveyed a legal interest to him.  Wife owned that property prior to the marriage and never transferred it to Husband before the bankruptcy cases were filed.  Husband was no more than a tenant at the time the bankruptcy cases were filed and his right to possession did not rise to the level ownership required for a homestead exemption.

Ownership of real estate after a divorce.  

Kansas does not establish a marital estate until a divorce petition is filed. When the estate is created each spouse obtains a common, divisible interest in the marital real estate. Because Husband did not have legal title when the bankruptcy petition was filed, he is unable to later use the marital estate to claim ownership on 1621 Holland. This case also points out that the divorce decree from the state court is invalid because the bankruptcy court did not give its permission to lift the automatic stay.  

Resides there alone or with family 

Kansas courts have traditionally concluded that a family (including married debtors) may only claim one homestead. In this case, the Vazquez’ were married at the time of filing and there had been no transfer to Husband beforehand and can only be allowed one exemption.  The evidence showed that the exemption for the Wife on the residence she occupied was a valid homestead.  The residence occupied by the Husband was not a valid homestead and the house and land were property of the Wife’s bankruptcy estate.  There is at least one case where the bankruptcy court found it was appropriate under the facts to grant the debtors separate homesteads even though they were still married, but this case did not have any facts that allow the same exception.

Conclusion: 

When deciding to file bankruptcy, talk to your spouse and your attorney to determine whether you should file jointly or separately.  It is possible in Kansas to plan out your case and make sure these considerations are taken into account before filing.  It might have been possible to complete the divorce action and all the property transfers required before filing the bankruptcy cases.

It is also prudent to understand that Chapter 7 can be very unforgiving if there are problems whereas Chapter 13 reserves the right of dismissal for the debtor.  In a Chapter 13 case the Wife could have dismissed her case after the Husband was not allowed to claim the exemption. They would at least have had the chance to take some other course of action instead of just losing the property to the Chapter 7 bankruptcy trustee. 

If you have questions about bankruptcy please feel free to contact our office for a free consultation with one of our bankruptcy attorneys.  We have offices in Wichita, Topeka, Lawrence, and Overland Park and we serve all of Kansas.  Please don’t hesitate to give us a call.

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