Source: https://www.southerncaliforniabankruptcylawblog.com/2016/04/06/voluntary-sales-and-the-homestead-exemption/
Timestamp: 2019-04-20 15:11:51+00:00

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In this post I will discuss what happens to the homestead exemption when the debtor voluntarily sells the primary residence, either in bankruptcy, or outside of bankruptcy.
(2) be accountable for all property received; . . .
11 U.S.C. § 704(a)(1) and (2).
(c) Unless the court orders otherwise, any property scheduled under section 521(a)(1) of this title not otherwise administered at the time of the closing of a case is abandoned to the debtor and administered for purposes of section 350 of this title.
In each of (a), (b), and (c) the abandonment is the result of a court order (in (c) the order is the order closing the case). Therefore, if there is no court order, there has been no abandonment.
This observation clears up a common misunderstanding about what happens when the Chapter 7 Trustee files a no-asset report after the meeting of creditors under 11 U.S.C. § 341(a). Some people are under the mistaken impression that once the Trustee files a report stating that there are no assets to be liquidated for the benefit of creditors, the debtor is free to dispose of them as he sees fit. However, as § 554(d) makes clear, unless the court orders abandonment, as long as the case remains open the Trustee can still go after assets that turn out to have greater value than the Trustee initially believed. See In re Gebhart, 621 F. 3d 1206 (9th Cir. 2010) for an example of a case in which the Debtor initially was able to exempt the equity in his primary residence, but ended up losing the property because the value increased above the equity exemption amount before the Bankruptcy Court closed the case.
Suppose the court ordered the Trustee to abandon the debtor’s principal residence because all of the equity was exempt, making the asset burdensome to the estate. If the debtor were to sell the property what would happen to the proceeds? To answer this question we need to know how the Chapter 7 debtor can exempt the equity in his primary residence.
In a Chapter 7 bankruptcy in California there are two ways to claim a homestead exemption. One way is to claim the automatic homestead exemption under Cal. Civ. Proc. Code § 704.730 if the debtor hasn’t recorded a homestead with the County Recorder’s Office.
The other way is to claim the homestead exemption under Cal. Civ. Proc. Code § 704.950, based on a homestead that was recorded with the County Recorder’s Office prior to filing for bankruptcy protection.
In California, however, the automatic homestead exemption protects a debtor only in the context of a forced lien sale. See Cal. Civ. Proc. Code §§ 704.720(b) & 704.740(a); Schwaber v. Reed (In re Reed), 940 F.2d 1317, 1321 (9th Cir. 1991) (“[T]he ‘homestead exemption’ in California is merely a debtor’s right to retain a certain sum of money when the court orders sale of a homestead in order to enforce a money judgment . . .”); Redwood Empire Production Credit Assoc. v. Anderson (In re Anderson), 824 F.2d 754, 757 (9th Cir. 1987). A debtor who seeks homestead protection in the context of a voluntary sale must record a declaration of homestead. See Cal. Civ. Proc. Code § 704.960; Anderson, 824 F.2d at 757. Under California law, should a forced lien sale occur, a debtor will receive his statutory homestead exemption before payment of the judgment lien because a debtor’s homestead exemption is senior in priority to a judgment lien. See Cal. Civ. Proc. Code § 704.850; see also Amiri, 184 B.R. at 63 (“In the event of a forced lien sale, the levying officer is required to distribute the proceeds to pay off all consensual liens and the debtor’s homestead exemption prior to satisfying any judgment liens.”).
In re Wilson, 90 F. 3d 347, 351 (9th Cir. 1996).
The Ninth Circuit’s holding in Wilson means that if the debtor has used the automatic homestead exemption instead of the recorded homestead exemption, and then voluntarily sells the property after court-ordered abandonment, the net proceeds of the sale are not exempt, and are fair game for the Trustee to seize.
You might counter that the proceeds are protected by the abandonment order. But that order protected the exempt home equity, not the nonexempt sale proceeds. Therefore, the safest thing to do is to wait until the case closes before selling the residence because once the Court closes the case the property and any subsequent sale proceeds belong to the debtor. 11 U.S.C. § 554(c)).
Practice Tip: If you’re a homeowner and haven’t already done so, record your homestead.
If a homestead is sold . . . the proceeds of sale . . . are exempt in the amount of the homestead exemption provided in Section 704.730. The proceeds are exempt for a period of six months after the time the proceeds are actually received by the judgment debtor, except that, if a homestead exemption is applied to other property of the judgment debtor or the judgment debtor’s spouse during that period, the proceeds thereafter are not exempt.
This means that if the case is still open and the debtor fails to reinvest the proceeds in another domicile within six months of receiving them, the Trustee can swoop on in like a bird of prey and seize the money. Again, it is safest to wait until the case closes to sell the property.
Things are a bit more complicated in the Chapter 13 context.
As a prelude to selling the principal residence the debtor must file a motion for authority to sell real property. If the plan will pay less than 100% of the debtor’s prepetition debts, the Chapter 13 Trustee may insist that as a condition of the sale the debtor devote all net sale proceeds to the plan ― up to the point that the creditors are paid in full.
If the debtor used the recorded homestead exemption, then the debtor may successfully assert a claim to the exempt portion, with the six-month reinvestment caveat waiting in the wings.
But if the debtor used the automatic homestead exemption, then the Trustee may appeal to the Wilson holding and claim that the nonexempt proceeds of the voluntary sale belong to the bankruptcy estate and should be devoted to paying creditors.
In either case the debtor might be able to retain all of the net sale proceeds if the Court accepts the holding in In re Burgie, 239 B.R. 406 (B.A.P. 9th Cir. 1999).
In this case we must decide whether the unreinvested proceeds from the sale of the debtors’ homestead after the confirmation of the chapter 13 plan constitute “disposable income” that must be used to pay creditors pursuant to a motion by the trustee to amend the plan.
In re Burgie, 239 B.R. at 407.
The Court held that the proceeds did not constitute disposable income within the meaning of 11 U.S.C. § 1325(b)(1) and (2), and therefore didn’t have to be devoted to the plan. This meant that the debtor could retain all of the net proceeds regardless of any homestead exemption, automatic or recorded.
This means that if you have a judge who doesn’t find Burgie persuasive, you might not be able to keep the sale proceeds. Of course, you could always appeal an adverse ruling to the BAP, which is bound by its own decisions. But that could lead to expensive litigation, with the potential for the Chapter 13 Trustee to appeal to the Ninth Circuit.
In a case in which the debtor is an individual and in which the holder of an allowed unsecured claim objects to the confirmation of the plan — . . . the value of the property to be distributed under the plan is not less than the projected disposable income of the debtor (as defined in section 1325(b)(2)) to be received during the 5-year period beginning on the date that the first payment is due under the plan, or during the period for which the plan provides payments, whichever is longer.
Thus, if the plan is confirmed over the objection of an unsecured creditor and the debtor is devoting all of his disposable income to the plan, he might argue, à la Burgie, that the sale proceeds aren’t disposable income that must be devoted to the plan.
If you have no creditors, you’re free to sell anything you want ― other than the usual contraband such as marijuana, heroin, cocaine, Ross Perot campaign Kool-Aid, etc.
However, if judgment creditors have claims against you, then the Wilson holding applies to the voluntary sale of your home: You get to keep the exempt portion of the net sale proceeds (with the usual six-month reinvestment caveat) if you recorded the homestead with the County Recorder’s Office; but if you didn’t record the homestead, all of the net sales proceeds are fair game for your creditors.

References: § 704
 § 341
 § 554
 § 704
 § 704
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 § 704
 § 704
 § 554
 § 1325