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Homestead Exemption Proceeds - Beware the Trustee

One issue which comes up when contemplating the filing of bankruptcy is the homestead exemption. Normally the issue is fairly straightforward. Arizona’s Homestead Exemption, ARS. 33-1101provides: Homestead exemptions; persons entitled to hold homesteads
A. Any person the age of eighteen or over, married or single, who resides within the state may hold as a homestead exempt from attachment, execution and forced sale, not exceeding one hundred fifty thousand dollars in value, any one of the following:

1. The person’s interest in real property in one compact body upon which exists a dwelling house in which the person resides.

2. The person’s interest in one condominium or cooperative in which the person resides.

3. A mobile home in which the person resides.

4. A mobile home in which the person resides plus the land upon which that mobile home is located.

B. Only one homestead exemption may be held by a married couple or a single person under this section. The value as specified in this section refers to the equity of a single person or married couple. If a married couple lived together in a dwelling house, a condominium or cooperative, a mobile home or a mobile home plus land on which the mobile home is located and are then divorced, the total exemption allowed for that residence to either or both persons shall not exceed one hundred fifty thousand dollars in value.

C. The homestead exemption, not exceeding the value provided for in subsection A, automatically attaches to the person’s interest in identifiable cash proceeds from the voluntary or involuntary sale of the property. The homestead exemption in identifiable cash proceeds continues for eighteen months after the date of the sale of the property or until the person establishes a new homestead with the proceeds, whichever period is shorter. Only one homestead exemption at a time may be held by a person under this section.

There is no requirement to file any paperwork with the county recorder if you only have one home that you live in. If you have more than one home, you may wish to consider filing a homestead declaration with the county recorder where you live.

Although the homestead exemption appears to be rather straightforward, there are issues which may arise. One of those issues comes up when a debtor sells their home BEFORE filing bankruptcy, or AFTER filing bankruptcy. It is possible to exempt or hold safe, the proceeds from the sale of one’s homestead, however, there are strict requirements that have been developed through case law. A debtor who sells a home should place that money in a special bank account that has ONLY homestead proceeds. No other monies should be co-mingled in the account. To co-mingle could result in a loss of the exemption to the Trustee or to creditors.

A very important rule, which goes to the purpose of the homestead exemption, is that one who sells a home and does segregate the homestead proceeds must use the proceeds to purchase another home within eighteen months after receiving the proceeds. Failure to use the proceeds to purchase another home could result in the loss of the exemption and a trustee’s move to confiscate the funds for the benefit of creditors.

Bottom line is that the homestead exemption is very important and allows one to exempt up to $ 150,000.00 in equity for the purpose of a home. If you choose to sell your home before, or shortly after the filing of a bankruptcy, it is extremely important that you contact competent bankruptcy counsel to guide you through the process so that your homestead proceeds are not put at risk of loss.