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Court takes common sense approach to homestead exemption

Florida residents who have a regular and reliable source of income and file for Chapter 13 bankruptcy are generally able to retain their property while obtaining debt relief. The homestead exemption protects the equity that debtors have accumulated in their primary residences from creditors, but the courts have been inconsistent in determining how this exemption should be applied in situations where the property concerned is jointly owned.

The problem becomes a particularly thorny one when courts are tasked with deciding how judicial liens will be treated when a Chapter 13 petitioner owns a primary residence jointly or in common with a non-debtor. The U.S. Bankruptcy Code provides a formula to assist judges in this situation, but a number of federal courts have eschewed strict adherence to this formula when following it would result in a windfall for debtors. This is because the federal formula calls for the entire mortgage balance to be deducted from the debtor’s share of the property.

On June 2, a U.S. District Court judge presented with such a decision chose to take what is referred to as the common sense approach. This approach deducts the mortgage balance from the full value of the property and then divides the remaining equity proportionately between the property owners. The homestead exemption is then deducted from the debtor’s share of the equity to determine how much equity remains for the holders of judicial liens.

Individuals who are struggling to cope financially are sometimes reluctant to seek debt relief because they fear that they could lose their homes, automobiles or other assets. Attorneys with experience in this area will likely be familiar with such concerns, and they could explain how the bankruptcy laws were designed to provide a fresh start rather than punish. Attorneys may also point out the differences between filing a Chapter 7 or Chapter 13 bankruptcy and pursuing other forms of debt relief such as debt settlement or consolidation.

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