When deciding the amount of homestead exemption to which a debtor is entitled, should a bankruptcy court apply the state exemption in effect on the creation date of the lien or on the bankruptcy filing date? According to the Ninth Circuit in a recent decision, the court should apply the state exemption law in effect on the filing date of the bankruptcy petition.
In Barclay v. Boskoski, the appeal arose out of the debtor’s attempt to avoid, in bankruptcy, a 2014 judgment lien in the original amount of $256,075.95 recorded against his home. The debtor filed for bankruptcy protection in 2021. Between the creation date of the lien and the date of his bankruptcy filing, the amount of California’s homestead exemption increased significantly, from $100,000 for a married debtor in 2014 to $600,000 in 2021. Under California law, the exemption would be fixed at the 2014 amount. But the bankruptcy court applied the $600,000 homestead exemption available in 2021, which allowed the debtor to avoid the entire lien. Calling the decision “a close call on an important question,” the bankruptcy court certified a direct appeal to the Ninth Circuit.
Relying heavily on the Supreme Court’s decision in Owen v. Owen, which held that a bankruptcy court is to determine not the exemption to which the debtor is entitled, but that to which he would have been entitled in the absence of any judgment liens on the home, the appellate court upheld the bankruptcy court’s ruling. “[I]n deciding whether a judgment lien impairs a debtor’s California homestead exemption, the Bankruptcy Code requires courts to determine the amount of exemption to which the debtor would have been entitled in the absence of the lien at issue. In this case, that means we apply the state exemption law in effect on the filing date of the bankruptcy petition … .”
Lenders to homeowners in the Ninth Circuit should take note of this decision, as it materially increases the risk that lenders’ liens may be avoided under 11 USC 522(f).