This is the question posed in the recent case of In re Martiny, 2007 WL 3326585 (Bkrtcy.W.D.N.Y.,2007). The debtors, husband and wife, filed a Chapter 7 bankruptcy after entering into a contract to sell their residence at 90 East Terrace Avenue in Lakewood, New York. Before finalizing either step, Mr. and Mrs. Martiny used $36,000 of otherwise non-exempt assets to reduce the balances due on obligations secured by mortgages on their home. Although they had already contracted to sell their residence to a third party, the debtors still lived on the premises. Accordingly, in schedules filed with their bankruptcy petition, the debtors claimed a homestead exemption. On May 21, the debtors moved to compel the trustee’s abandonment of the East Terrace property, so that they might consummate the proposed sale. As an interim measure, the debtors and their trustee agreed to close the transaction, but to place the net proceeds into escrow until a resolution of the trustee’s objection to the claim for a homestead exemption.

Judge Bucki, in holding that the debtors could claim the homestead exemption, noted that nothing in C.P.L.R. § 5206(a) even suggests that the homestead exemption is to be conditioned on an intent for long term residency. Rather, the statute allows an exemption to any owner who resides on the property on the date of bankruptcy. In as much as Mr. and Mrs. Martiny owned the property jointly, they may each receive an exemption for $50,000 of equity value, for a total exemption of $100,000.

The Court looked to the debtors’ pre-bankruptcy planning (they transferred non-exempt asset of $36,000 to pay down their mortgages prior to filing) as an allowable move. It was noted that 11 U.S.C. § 522(b)(3)(A) looks to state exemptions applicable “on the date of the filing of the petition.” Similarly, 11 U.S.C. § 522(b)(3)(B) recognizes exemptions for interests that the debtor has in property “immediately before the commencement of the case.” Thus, the statutes focus on the status of ownership as of the moment of bankruptcy filing, and not as of the date of any pre-petition event. Absent evidence of fraud, the court will allow any recognized exemption for assets that debtors own at the commencement of the bankruptcy proceeding, even when the debtors may have enhanced the value of that exemption by reason of careful planning with the advice of counsel.

Finally, it was noted that the legislative history for section 522 states that “the debtor will be permitted to convert nonexempt property into exempt property before filing a bankruptcy petition…. The practice is not fraudulent as to creditors, and permits the debtor to make full use of the exemptions to which he is entitled under the law.” H.R. REP. No. 95-595, at 363, to accompany H.R. 8200, 95th Cong., 1st Sess. (1977), reprinted in BANKRUPTCY CODE, RULES & OFFICIAL FORMS, at 268 (Thompson West 2007).

Score one for the consumer!