Last month at the OCBA’s Recent Law seminar hosted by Jay Chien from Amran Cohen’s office and Richard Marshak, the chapter 7 trustees present talked about what they would do when they sold a house and then the debtor was entitled to his homestead exemption. For example, the debtor lives in the house and is entitled to $100,000 exemption under CCP 704. The trustee sells the house for $200,000. The trustee uses the proceeds to pay debts of the bankruptcy estate, then the trustee is to give the $100,000 to the debtor and under CCP 704.720 comes into play:
CCP 704.720 proceeds within six months
(b)If a homestead is sold under this division or is damaged or destroyed or is acquired for public use, the proceeds of sale or of insurance or other indemnification for damage or destruction of the homestead or the proceeds received as compensation for a homestead acquired for public use are exempt in the amount of the homestead exemption provided in Section 704.730. The proceeds are exempt for a period of six months after the time the proceeds are actually received by the judgment debtor, except that, if a homestead exemption is applied to other property of the judgment debtor or the judgment debtor’s spouse during that period, the proceeds thereafter are not exempt.
The Trustees discussed what they might do with the $100,000. Some trustees have held the $100,000 for six months to see if the debtor will invest it into another property. Other trustees will give the money to the debtor. Under this scenario the debtor is suppose to use the $100,000 for a new house, but what if they do not use it for another house, then what happens?
This is a dilemma for the trustee on what to do with the money. As it appears from the statute that the six months does not start running until the money is received by the debtor. If the trustee holds the money then it has not been received by the debtor. If the trustee gives the money and it is not used for homestead in another property, the trustee is stuck and has few alternatives.
The Chapter 7 trustees present did not have a common answer for the problem. One said he would negotiate with the debtor for a portion of the money, while the other said he would give the money outright to the debtor.