Selling a Home During an “Open Bankruptcy” and Protecting the Proceeds in Arizona
Arizona has a friendly homestead exemption, which allows anyone over 18 years of age and who resides in Arizona, to protect up to $150,000 in equity (See A.R.S. §33-1101(A)(1)). If the homestead is sold, the resulting proceeds are also exempt up to this amount, with certain accompanying caveats. Specifically, the funds must be placed into a separate account, free from the commingling over other funds, and must be reinvested in a new homestead within 18 months.
Arizona statutes and Arizona Bankruptcy Courts, i.e. the Ninth Circuit Bankruptcy Appellate Panel and the Ninth Circuit Court of Appeals, have addressed this issue on several occasions and have reinforced the above requirements. In 2006, In re Foreacre, the Court held that debtors homestead proceeds lost their exempt status when debtors failed to segregate the proceeds, but rather commingled them (See In re Foreacre,, 358 B.R. 384 (Bankr.D.Ariz. 2006)). That same year, the Bankruptcy Appellate Panel concluded that the bankruptcy estate has a “contingent, reversionary interest in the sale proceeds” (See In re Smith, 342 B.R. 801 (9th Cir. BAP 2006).
Debtors must segregate the homestead funds and use them in a manner consistent with A.R.S. §33-1101(C), which is the requirement to reinvest in a new homestead. The Court in In Re Strasser, found that when a debtor transferred their homestead proceeds to a family member, the exemption was waived (See In re Strasser, 303 B.R. 841, 848 (Bankr.D.Ariz. 2004). The Strasser Court concluded the resulting homestead proceeds lost their exempt status when 1) the funds failed to be reinvested in a new homestead within 18 months, and 2) when the funds were transferred (citing Trujillo v. Grimmett (In re Trujillo), 215 B.R. 200, 205 (9th Cir. BAP 1997)), and 3) when the deed to Debtor’s home was transferred, the funds were deemed abandoned.
The purpose of Arizona’s homestead and the resulting sale proceeds is to substitute one family residence for another. Arizona.Revised Statute §33-1101(A) and (C) work in tangent to accomplish this policy. If a Debtor wishes to file bankruptcy in Arizona and has significant homestead equity, they should work with an attorney to protect the homestead and resulting proceeds (if the home is eventually sold).
Exception – In some instances, a debtor can negotiate with the bankruptcy estate/trustee to have the funds “abandoned” from the bankruptcy estate. A bankruptcy debtor should not sell a home post-bankruptcy without consulting with their attorney first. Our office has successfully negotiated removing a home from the bankruptcy estate and negotiated lifting the restrictions by settling the restrictions through a Rule 9019 compromise. However, these compromises still require conforming to applicable laws.