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Client Sells Former Residence And Pays Down Mortgage On Current Homestead: Fraudulent Conversion?

By Jonathan Alper

Five years ago one of my clients bought a new home pre-construction while he lived in his then current Florida homestead. The builder told him the new home would take 18 months to build. The builder finished early, in 12 months, and wrote my client a letter saying the home was soon complete and that under the construction contract he must purchase the new home in 30 days. The client had not yet put the existing home on the market (in the old days, it took only a month or two to sell a house). So, the client closed on the new home, then put the old home on the market. Three months after moving he sold the old home. He used all the sales proceeds to reduce the principal balance of the new mortgage on the new house. Now, he wants to file Chapter 7 bankruptcy and asks whether transferring the sales proceeds to the new house is a fraudulent transfer.

When the debtor moved to the new home he moved his homestead. The hold home ceased to be an exempt homestead property when the debtor moved in to the newer home as his principal residence. The use of sales proceeds to pay down the homestead mortgage was a conversion of non-exempt money to an exempt asset. The transfer cannot be attacked under Florida fraudulent transfer statutes because it occurred five years ago, beyond the statute of limitations. However, conversion of money to a homestead property within 10 years of filing bankruptcy may be avoided under bankruptcy law if the debtor intended to pay down his mortgage to avoid creditor claims.

Even though this occurred within the 10 year bankruptcy window, I do not think what this debtor did with his old house could reasonably be undone as a fraudulent conversion. The conversion of money into a homestead is reversible only if the debtor had actual intent to defraud creditors. This transaction does not appear to be a plan to defraud creditors or a bankruptcy trustee. This transaction looks like a normal person moving into a new home in a normal manner. Obviously, this debtor intended to sell his old home and use the money to buy a new home. Only because the home was ready unexpectedly early did the debtor have to move first and sell second.

Full post as published by Florida Bankruptcy Law on October 18, 2010 (boomark / email).