The debtors, a husband and wife, were insolvent and filed for Chapter 7 bankruptcy. Before filing, one of the debtor’s great-uncles offered to help and wired $209,200 to their savings account. The debtors used this money to purchase a home (the “homestead”) and to make a car loan payment. According to the debtors, the wired funds were a gift. The trustee, however, asserted the wired funds were a loan, which he was entitled to in the bankruptcy case. The debtors then claimed a homestead exemption for the house they purchased with the wired funds. The trustee, still skeptical of the purchase, questioned the accuracy of the debtors’ responses to Questions 5, 18, and 20 on the debtors’ Statements of Financial Affairs (“SOFA”). The debtors contended they properly disclosed the homestead and misread the form. The trustee objected to this claim and sought relief, claiming the debtors had intent to hinder, delay, or defraud a creditor.
In In re Ashwood, No. 24-11378-T, 2025 WL 2806303, 2025 Bankr. LEXIS 2485 (Bankr. N.D. Okla. Sept. 30, 2025), the bankruptcy court for the Northern District of Oklahoma overruled the Trustee’s objection to the Debtors’ Claim of Homestead Exemption. Under § 522(o), and § 522(p), of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), the debtors may not exempt any amount of interest they acquired in the 1215-day period before filing the bankruptcy petition exceeding [at that time, $189,050] in value. Amounts under the cap, however, may be protected. The provision exists to prevent and close the “mansion loophole,” in which debtors could protect assets under generous homestead exemptions in states with such exemptions. Together, creditors’ rights are protected from defrauding debtors who attempt to exempt otherwise non-exempt assets. The loophole counteracts the purpose of the homestead exemption, which sought to protect families, not to effectuate fraud. With the modern developments, a four-part test determines if the exemption was properly reduced. The first three elements were not contested. The court considered if the proceeds of the disposed of property were used to increase the debtor’s interest, with an additional “badge of fraud,” which determines the requisite intent to hinder, delay, or defraud a creditor. The Tenth Circuit had laid out several “badges of fraud.” The first two—inadequacy of consideration and insider transfer—were not contested. The trustee’s claim largely rested on the third badge: intent to keep the transfer secret. The badge was met when the trustee demonstrated that the debtors had attempted to conceal the disposal of the homestead funds at the time of the transfer to a third party. While the account that held the funds was not in the name of either debtor, there was no evidence that the debtors held the funds with the intent to conceal the funds from a third party. The court also found there was no evidence suggesting the debtors had attempted to conceal the funds from any other creditor during the timeframe. The court concluded that the debtors had no obligation to alert creditors to the existence of the funds. The court also concluded that the debtors’ misreading of the SOFA was not furtherance of a scheme to defraud creditors. Because the acquisition and interest had been openly disclosed, the trustee was sufficiently notified of their existence. The court also claimed the statement regarding the funds only in response to SOFA Question 5 had been sufficient. The court did not expect the debtors to understand the technicality of all the questions, nor did it expect them, to the best of their knowledge, to know that the funds did not need to be reported in response to that question. Finally, the failure to disclose the bank account under Question 20 had not been fraudulent, despite the need to disclose it. Because the debtors had acted innocently, the omission was not made to perpetrate fraud or otherwise conceal the existence of the funds, so there was no fraud. The court found for the debtors on this badge of fraud. The remaining badges all favored the debtors. The debtors did not worsen their creditors' position. Nor did the debtors engage in a pattern or series otherwise indicating fraud. The debtors’ purchase of the home was consistent with the established insolvency timeline. The court therefore overruled the trustee’s objection.
By Andrew Fielden [email protected]
Edited by Annette Addo-Yobo [email protected]
Edited By Hayden Mariott [email protected]