Saturday, January 3, 2009
Case Law Development: Husband who has no title to family home may not claim homestead exemption in bankruptcy
Teaching in a common law property state, I am struck by how often my students have difficulty separating out property title systems during the marriage from those used in divorce. They want to apply "marital property" characterizations during the marriage, though I repeatedly emphasize that there is not such a scheme in common law title-based states.
The United States Court of Appeals for the Seventh Circuit has provided a lovely case for emphasizing to the students the importance of the distinction between ownership systems during the marriage and those that govern upon divorce. The case involved a husband and wife who had joint title to their home and then divorced. The home was awarded to wife. The couple then reconciled and remarried, but wife continued to hold the home in her name only. During the second marriage, the couple filed for bankruptcy. They each claimed a state homestead exemption in the family home. Though title to the home was in wife only and husband was not liable on the mortgage, he had contributed funds and labor and the home had appreciated in value. Under Illinois law, he could have asserted this contribution as entitling him to a marital property interest in at least some of the value of the home upon divorce. However the couple were not divorcing, so the divorce laws did not apply.
Resolving conflicting lower court opinions and reversing the decision of the district court, the court of appeals held that, during the marriage, husband's inchoate marital property interest did not give him a present ownership interest in the home so that he could claim a homestead exemption.
As the oral arguments make clear, the interaction of state homestead laws and federal bankruptcy laws results in a dizzying array of decisions on the principle issue in this case, depending on one's jurisdiction. For a good overview article of the intersection of family law and bankruptcy, see Shayna M. Steinfeld, The Impact of Changes under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 on Family Obligations, 20 J. Am. Acad. Matrimonial Law. 251 (2007).