Daily Development for Wednesday, January 21, 2008
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

Thanks to Bill Hart for informing us of this case.  The writing is all mine, however, so don’t blame bill.

BANKRUPTCY; HOMESTEAD: To qualify for state homestead allowance (at least in Illinois) a spouse, though resident in the home, must have a titled interest in the property.  Potential marital rights at death or divorce are insufficient.

In re Belcher, 2008 Westlaw 5412097 (Seventh Cir. 12/31/08)

This case resolves a troublesome split in Illinois federal courts.  In fact, in this case, both the bankruptcy court and the federal district court, on first appeal, had found for the debtors, albeit on somewhat different grounds.  But a number of other lower courts had concluded that a non-titled spouse has no homestead claim.

The facts are somewhat compelling.  Mr. Belcher had been married to Mrs. Belcher once before, and at that time was on the title to the house.  Thereafter the couple divorced and the title passed to Mrs. Belcher.  They reconciled and remarried, Mr. Belcher took up residence in the house, and marital property or Mr. Belcher’s separate property was used to pay the mortgage and household expenses.  Nevertheless, he never appeared on the title nor on the mortgage (though he participated in paying the mortgage.)

Both spouses declared bankruptcy, but the Seventh Circuit here, reversing the courts below, found that only the wife was entitled to the state law exemption.

The court noted a number of anomalous results that might obtain if it found otherwise.  For instance, if only Mr. Belcher had filed for bankruptcy, the house (in Mrs. Belcher’s name) clearly would not be part of the bankruptcy estate, certainly a result inconsistent with recognizing his homestead interest here.

Comment: Both sides make really excellent arguments - remember the debtors convinced two courts before getting to the Seventh Circuit. Certainly the rule adopted by the court provides some certainty and avoids some hair splitting factual arguments.  But the Illinois homestead argument would have worked if the parties could even have documented a lease to Mr. Belcher (as the editor understands the arguments).  The problem was that they were just too informal, as spouses tend to be.  Clearly this is an issue a debtor’s counsel should look into in preparation for filing. 

It is hard to say how far in advance of filing the parties should have documented their economic and real estate relationship.  Perhaps there was no time.  A footnote indicates that the parties were again divorced during the bankruptcy proceedings. 

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