Risking a Homestead Exemption in a Living Trust
During bankruptcy a debtor may protect the equity in his residence by claiming a homestead exemption. Bankruptcy courts look to state law to determine whether the property qualifies as the debtor’s homestead. This analysis can get complicated if the debtor has placed the property into a living trust before filing bankruptcy.
In many states the law is clear and case law has previously decided that the debtor does not lose his or her homestead exemption when the property is owned by the living trust. For instance, New Hampshire’s General Statutes specifically state that a home in a living trust may still be exempted by the debtor in bankruptcy as a homestead. Likewise, on certification of a question from the U.S. Court of Appeals for the Tenth Circuit, the Kansas Supreme Court determined that a bankruptcy debtor may claim a homestead exception even after the real property was transferred to a living trust prior to bankruptcy. See Redmond v. Kester, Redmond v. Kester, 284 Kan. 209, (2007).
On the other hand, in some states, notably Texas, the debtor loses the ability to claim a homestead exemption if the property is owned by a Living Trust. Under the Texas Property Code, trust property is owned by the trust, not the debtor. Consequently, the debtor is unable to claim the homestead exemption.
The bottom line is this: if you are thinking that a living trust will protect your home during bankruptcy, you may be making a huge mistake. If you have already placed property into a living trust, you may need to transfer the property back to yourself before you file bankruptcy. However, every situation is unique and requires the careful review of an experienced attorney prior to a bankruptcy filing.