Consider a man and his wife who moves from Georgia to Florida and purchase a homestead for $100,000 cash. Title to the Florida homestead is in the name of the husband only. After he and his wife reside in the new home for a few months, the man gets an equity line second mortgage. He uses $50,000 of loan proceeds to purchase an investment property title to which is taken in the wife’s name only. A year later, the man encounters severe financial difficulty and files chapter 7 bankruptcy.
Because he has not lived in Florida for two years prior to filing he is not eligible for Florida bankruptcy exemptions and must file with Georgia exemptions even though he is a Florida resident. Georgia has a relatively small homestead exemption which I’ll assume is $10,000. (exact amount is not relevant ). Therefore, only $10,000 of his homestead is an exempt asset in bankruptcy. The issue is whether the equity line loan used to purchase the $50,000 property for his wife is a fraudulent conveyance of $40,000 subject to attack in the bankruptcy
I don’t know of any judicial decisions on point with this situation.. Whether a transfer is a reversible fraudulent transfer depends on the debtor’s intent. Facts and circumstances are evidence of intent, but there is not formula of fact to infer intent in every case; each case must be examined under its own facts.
Looking at the transaction solely within the bankruptcy context, there has been a conveyance to the wife of non-exempt equity to of $40,000 within a short time prior to bankruptcy. Yet, at the time the transfer occurred the man was under Florida’s unlimited homestead exemption law, and at that time his transfer of money to his wife was the transfer of proceeds from an exempt homestead.
This case presents the question of whether a transfer of exempt property to another person can subsequently be reversed as a fraudulent conveyance if the transferor files bankruptcy and where the same asset transferred is not exempt under the bankruptcy law.
A bankruptcy trustee or bankruptcy judge could rule that the transfer of an asset not exempt in the bankruptcy context may be a fraudulent transfer. In my opinion, subject to finding a contrary decision, is that the transfer is not a fraudulent transfer because at the time of the transfer the asset was exempt homestead. The transferor/debtor could not have intended to make a transfer to avoid creditors if he did not then anticipate bankruptcy and knew that the asset would not be exempt in bankruptcy.