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Homestead Proceeds Exempt

If you’ve read my newsletter on homesteads, you understand that in most cases $500,000 of equity in a principal residence can be exempted in a bankruptcy case. But the question remained: if the principal residence were sold subsequent to the bankruptcy filing would the proceeds of the sale remain exempt? The United States Court of Appeals for the First Circuit addressed that issue in the case of In re Cunningham, 513 F.3d 318 (1st Cir. 2008). The Court decided that proceeds of a sale of exempt property retain exempt status. The facts of the case involved a creditor whose claim survived the bankruptcy, as it was not dischargeable due to fraud. The debtor owned a home and properly claimed his homestead exemption. When the debtor tried to sell the home, the creditor attempted to reach the proceeds. The creditor argued that once the homestead was converted to cash, the homestead protection of the exemption ceased. The Court disagreed, and found homestead protection extends to the proceeds of the sale of the home. The Court based it’s ruling on language found in 11 U.S.C. section 522(c) which reads in part property “exempted under this section is not liable during or after the case for any debt of the debtor that arose . . . before commencement of the case . . .” The Court did recognize exceptions for debts such as child support arrears and taxes.