JasonS68

Pennsylvania Homestead Exemption for New Construction

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I have a (somewhat) curiosity question concerning the homestead exemption in Chapter 7 bankruptcy in Pennsylvania.

 

I have a home with no equity, but I have a lot of credit card debts and am considering filing Chapter 7. If I have an addition constructed on my home (Increasing the home value by say $25,000) and pay for it by credit card - and then wait 6-12 months before filing Chapter 7, can I claim the $25,000 as Homestead Exemption and discharge the debt even though that $25,000 is part of the debt to be discharged?

 

Does anyone know of a statutory reason I couldn't do this? Are bankruptcy judges allowed to make "judgment calls", or do they go strictly by the statute? Thanks for everyone's thoughts.

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Not a easy question.

 

First, if your CCs are already behind or in question, you may not be able to charge another $25k...even the ones you've been paying on time may be closed by "universal default".

 

Second,  BK trustees are bound by the BK laws...but...they're paid like $60 per case plus a percentage  of what they can recover for distribution to creditors.  That makes some of them very aggresive in how they choose to intrepret the law.

 

Third, the "homestead exemption" would have to cover the entire current mortgage + improvements in order to protect you from foreclosure.

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I do have available balances on credit cards, and all of my credit, payments, etc. are current, so I am certain I could use them to pay for improvements.

 

"cover the entire current mortgage + improvements"? I'm not sure exactly what you mean. If the house is currently worth $200,000 (and outstanding mortgage is $200,000), but after improvements is worth $225,000 with $200,000 mortgage, that would leave me with $25,000 equity - which presumably would be exempt under the homestead exemption. Am I missing something?

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Well, the $25k equity would be exempt, but you'd still have to include the $200k in the BK.  End result, you'd probably lose the house.

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@JasonS68 - I don't think that the homestead would apply to your credit cards - meaning I don't think that the fact you charged the improvement on your credit card would make any difference.  Your home would be homesteaded based on current equity (current value minus loans against it).  

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I guess my question is whether it COULD be excluded. For instance, if the money was from a personal loan from a small local bank instead of credit cards, could the bank appear in bankruptcy court and argue that the equity in the home is directly from their loan (assuming it wasn't actually a personal loan NOT secured by the property) and should be exclude from the homestead exemption?

 

I know they COULD, but has anyone ever heard of anything like this, and do you believe it would have any chance of success?

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I guess my question is whether it COULD be excluded. For instance, if the money was from a personal loan from a small local bank instead of credit cards, could the bank appear in bankruptcy court and argue that the equity in the home is directly from their loan (assuming it wasn't actually a personal loan NOT secured by the property) and should be exclude from the homestead exemption?

 

I know they COULD, but has anyone ever heard of anything like this, and do you believe it would have any chance of success?

What you're suggesting is bk fraud. It's called a "bustout". You run up your cc's and then shortly thereafter you default.

Look for the cc company or the bank to promptly file an adverserial proceeding against to contest the discharge of tha particular debt. That's when a bk judge will may a "judgment call".

If bk is a viable option, your best course of action is stop using those cards.

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@bingo: But how could it possibly be proven that it was run up for the purpose of filing bankruptcy? Like I said, my credit accounts, etc. are in good standing so, at this point, I'd just be putting an addition on my home.

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Like I said, go thru the means test.  If you don't qualify for a BK 7 after you add $25k of unsecured debt, the running up the debt is silly anyway.

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@bingo: But how could it possibly be proven that it was run up for the purpose of filing bankruptcy? Like I said, my credit accounts, etc. are in good standing so, at this point, I'd just be putting an addition on my home.

@JasonS68 - I don't think it could be.  However, it's not exactly ethical.  

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@bingo: But how could it possibly be proven that it was run up for the purpose of filing bankruptcy? Like I said, my credit accounts, etc. are in good standing so, at this point, I'd just be putting an addition on my home.

Depends on just how tough your creditor wants to play.

Was the $25K outside the normal pattern of your credit card use? What was your financial situation at the time of the charges? How much cc debt did you have in relation to your income? Why would you want to go into high interest cc debt to add to a house with no equity?

Personally, I think you're playing with fire here.

You already admit to having high levels of cc debt and are considering bk. Just stop digging a deeper and deeper hole.

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