Debtors who owned two homes could claim an exemption for a “vacation” home

Under federal bankruptcy law, a debtor may be able to claim an exemption related to a homestead or residence. But what if the debtor owns more than one residence? Are there any circumstances under which a debtor could choose which home to exempt-even if the home claimed is not the debtor’s “principal” residence?

The United States Bankruptcy Court answered this question in the case of In re Demeter.

Claiming a homestead exemption

A husband and wife filed for Chapter 7 bankruptcy. The couple had owned two single-family residences for many years prior to filing for bankruptcy; one in the Detroit area and another in Cheboygan. The couple wished to apply a homestead exemption to the house in Cheboygan, but the bankruptcy trustee-the person administering the bankruptcy proceeding-objected.

The debtors had owned the Detroit-area house since 1972 and the trustee alleged that it had been the debtors principal residence ever since. The debtors had used the Detroit-area home as their home mailing address for voting, tax returns, and all bills and bank statements. In addition, at the time of filing the petition, the debtors were living in the Detroit-area home.

The debtors did not claim an exemption for the Detroit-area home, and the mortgage owed on that home exceeded the value of the property. The trustee argued that the Cheboygan home was a “vacation” home, which the couple had only owned since 1996 and that the exemption should not be applied to it.

The meaning of “residence”

The United States Bankruptcy Court noted that, under the applicable section of the federal bankruptcy code, the exemption applies to property the debtor uses as a residence. However the Code does not define the word “residence.” In addition, Michigan’s exemption statutes provide for a homestead exemption, but do not use the word “residence.”

The key question, then, was whether the debtors, who owned and used more than one home, could claim the exemption for the Cheboygan house, even though the Detroit-area house was the couple’s principal residence.

The Cheboygan home was fully furnished, the utilities operated year-round, and the debtors kept clothing and other property there. The husband had testified that the couple spent about one-half of each year there and spent time in the Detroit-area house only because of work. The couple had planned to live in Cheboygan full-time, if financially feasible.

The Bankruptcy Court found that the term “residence” as used in the federal law was not limited to a “principal” residence, and that a debtor could obviously have more than one
“residence,” as the couple did in this case. Congress had repeatedly made a distinction between “residence” and “principal” or “primary” residence” in other provisions of the law, but did not do so here. Therefore, the debtors exemption in the Cheboygan home under the Chapter 7 bankruptcy proceeding would be allowed.

The right solution for you

If you are suffering due to your financial circumstances, and wonder if bankruptcy is the right solution, you should consult with an experienced bankruptcy attorney. There is more than one type of bankruptcy protection, and which is best for you depends on your circumstances, such as the type of debt you owe and your current income, among other factors. Choose an attorney who can provide you with individualized advice to help you make the best possible fresh start on your financial future.