Real estate experts often advise homeowners that, when it comes to increasing a home’s value not all improvements are created equal. According to HGTV.com, a home seller can often recoup 100 percent of the cost of a “minor” bathroom or kitchen remodel. In contrast, only about half the cost of a deck addition will be reflected in value. The lesson is that it’s not always reasonable to expect that $50,000 in improvements will increase a home’s value by $50,000.
So what does this advice have to do with bankruptcy? According to a federal Bankruptcy Appellate Panel in a recent decision involving a Minnesota couple, the answer is quite a bit.
Homestead Improvements – “Cost” Versus “Value”
We’ve previously written about bankruptcy exemptions, including homestead exemptions. In Colorado, a homestead is a house and one or more lots of any number of acres, provided they are occupied by the debtor or the debtor’s family as their residence. The limit on value which can be exempted is $75,000 or $105,000 if the debtor is disabled or elderly.
The decision to declare bankruptcy is a potentially life-altering one and should only be made after careful consideration of all its consequences. Few people wake up one morning and suddenly decide to file for bankruptcy protection. Some debtors who see bankruptcy on the horizon will take actions intended to put certain assets beyond the reach of creditors. The Bankruptcy Code contains a number of provisions that penalize debtors who intend to deprive creditors of their fair share of the bankruptcy estate.
One such provision is Section 522(o) of the Code. It states that a debtor’s homestead exemption may be reduced by the value of any nonexempt assets used by the debtors in the ten years prior to filing in order to make improvements to the property. The intent of Section 522(o) is to recapture otherwise non-exempt assets (typically cash) that have been used to increase the value of the debtor’s homestead. There is an important qualification, however: the reduction will be made only if the court finds that the debtor acted with the intent to “hinder, delay, or defraud a creditor”. None of these terms are defined in the statute.
In the recent case of McDermott v. Crabtree (In re Crabtree), a Bankruptcy Appeals Panel was called upon to decide whether the Minnesota resident allowable debtors’ homestead exemption should be reduced pursuant to Section 522(o).
Although the facts were somewhat convoluted, the debtors apparently conceded that they had used non-exempt funds from several bank accounts to make improvements to their homestead within ten years prior to filing. The bankruptcy judge agreed with the trustee that one hundred percent of those funds were assets of the estate and that the debtors’ claimed homestead exemption should be reduced by that amount. The court agreed, and the debtors appealed.
This is where the real estate advice above comes into play. The debtors argued that the value, if any, added to the home was not necessarily equal to the cost of the improvements. They noted that the trustee had not offered an appraisal or other evidence as to how much value was added by the improvements in question.
The Bankruptcy Appellate Panel agreed. Noting that the plain language of Section 522(o) requires a reduction in the homestead exemption equal to the value added by the improvements rather than their“amount” or “cost”, the Panel rejected the trustee’s admittedly practical argument that requiring evidence of added value would be unreasonably burdensome. The Panel reversed the bankruptcy court’s decision and sent the case back in order to allow the trustee to demonstrate the extent to which the improvements increased the homestead’s value.
Section 522(o) does not define the term “value”. In the absence of such a definition, courts will look to the ordinary meaning of a term. The Merriam-Webster defines “value” as “the monetary worth of something”. As such, although the trustee made a good practical argument, the Appellate Panel refused to ignore the plain meaning of the term.
Because it found that the plain language of the statute required it to reverse the bankruptcy court’s decision, the Appellate Panel did not consider whether the debtors had acted with the intent to “hinder, delay, or defraud” any of their creditors.
If you have any questions about how bankruptcy could affect your home, we hope you’ll come in for a free consultation with an experienced Denver, Colorado bankruptcy lawyer. You can schedule your appointment by calling 303.331.3403 or by clicking here.