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Bankruptcy Court Must Consider Debtor's Intent with Respect to Future Residency in Homestead When Ruling on Exemption

In In re Diaz, 547 B.R. 329 (9th Cir. BAP 2016), the Ninth Circuit Bankruptcy Appellate Panel ("BAP") held that the bankruptcy court incorrectly interpreted California law related to the homestead exemption. In particular, the BAP said the bankruptcy court failed to consider the Debtor's intent to reside in the property in the future and that physical occupancy of the property on the petition date was not central to the determination of whether the debtor can claim a homestead exemption. Further, a temporary absence from the home, even on the petition date, did not preclude the debtor from claiming a homestead exemption.

On another note, the BAP stated that the party claiming the exemption (the debtor) will have the burden of proof as stated under state law despite Federal Rule of Bankruptcy Procedure 4003 providing that the party objecting to the exemption has the burden of proof. This has been an issue recently litigated and debated in the bankruptcy courts. The BAP ultimately remanded the case to the bankruptcy court for further findings.

This is an important decision for Chapter 7 trustees and will be very interesting to see how the bankruptcy court responds on remand.

For the full decision, please click here.

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