Posted by David Falvey on Thursday, December 30th, 2021 - 2,718 views

May you be born during interesting times!

The above is a famous Chinese curse and it could mean that Connecticut actually does not have a homestead exemption in bankruptcy at this time.

Why is this important?

Chapter 7 Bankruptcy is really called a ‘liquidation’ of debts and assets!

I have told clients who believe that Chapter 7 Bankruptcy is called ‘a liquidation’ and are fearful that their home will be liquidated in Chapter 7 . This is absolutely frightening.

Think of a conveyor belt carrying all your debts and dropping them into a fire and the debts are ‘LIQUIDATED’.

Of course you would cheer for this but then you have to put all your assets on the conveyor belt to be liquidated too!

This sounds scary and it is scary, but you have EXEMPTIONS!

Your exemptions allow you to take your assets off the conveyor belt and save them for yourself. Those assets are not liquidated. Why?

The Purpose of Filing Bankruptcy is to Obtain a ‘Fresh Start’

If you file a bankruptcy but have to lose all your assets including the clothes on your back, this won’t help you in the least in obtaining a ‘fresh start’.

The old bankruptcy code allowed creditors to literally take the clothes off your bank. At one time bankruptcy was a tool for creditors to strip you of all your assets. Creditors could actually come into your house and tear it apart.

And they did! They even knocked down walls and dug out your cellar. Thankfully, this is no longer allowed and it would be illegal to do so today.

Chapter 7 Allows You to Get Rid of Your Debts and Keep Your Assets

Chapter 7 will truly give you a ‘Fresh Start’. The purpose of a Chapter 7 or Chapter 13 is not to give you a head start by manipulating the system, but the goal is to give you a ‘new start’ or ‘fresh start’.

The U.S. Bankruptcy Code has a homestead exemption which is presently $25,150 per person or $50,300 in a joint filing.

How Does the Homestead Exemption Work in Bankruptcy?

If your home is worth $200,000, and you have a $150,000 mortgage, you add the debt of $150,000 + $50,300 = $200,300, then your home can’t be liquidated or sold in a Chapter 7 if you use Federal Exemptions to ‘exempt out’ the asset and take it off the conveyor belt of liquidation.

Now, each state in the United States has a homestead exemption in order to prevent creditors from seizing your home and selling it. You can choose between Federal Exemptions and State Exemptions in filing for debt cancelation or bankruptcy protection which is the same thing.

It’s called bankruptcy but ‘no one has a bench to break’. The word bankruptcy comes from the Italian word ‘Banca Rotta’ which means to ‘break the bench’. When a money lender during Medieval times couldn’t pay his bills, as sign that he was out of business, the creditors would break his bench in the marketplace.

No one’s bench is broken today but it’s called ‘bankruptcy’ which is still a scary word like ‘mortgage’ which means a ‘death pledge’—you pledge to pay a debt until it is dead.

Today bankruptcy is really ‘debt cancellation’. Now when people say, “Oh, he went bankrupt” this has the definite connotation that he was financially destroyed versus what really happens which is that he became free of debt.

We don’t say, ‘Oh, he used his ‘Freedom Card’ to get out of debt bondage’. The connotation found in words can really distort our emotional understanding of what actually happens.

In court, creditors are the ‘Offense’ and debtors are the ‘Defense’ but debtors have a powerfully offensive weapon called ‘Debt Cancellation’ or ‘Freedom Card’ or what we usually call ‘bankruptcy’.

Florida has an unlimited homestead exemption. When Florida was a swamp and the government wanted to attract new people to settle in Florida, their legislature enacted very pro-debtor laws like an unlimited homestead exemption to attract people to settle in their state. Other states range from a stingy homestead exemption to a very generous homestead exemption like Texas has.

At one time Connecticut was very stingy and had no homestead exemption, but in 1993 Connecticut enacted a homestead exemption of $75,000 each. So a joint filing had $150,000 of equity which could be exempted from liquidation and prevented creditors from seizing their homes.

This year (2021) I testified before the Connecticut Judicial Committee for our state legislators that Massachusetts and Rhode Island have a $500,000 homestead exemption. I also noted that New York has a larger homestead exemption depending on where you live in the state.

The Connecticut General Assembly enacted a new Homestead Exemption of $250,000 per individual or $500,000 for a joint filing. And as of October 1, 2021, this law went into effect.

However, I submit that Connecticut does not presently have a Homestead Exemption. But let me explain and clarify.

When Connecticut passed a Homestead Exemption in 1993 of $75,000, it became effective 10/01/1993. Attorneys rushed to use the new law in the U.S. Bankruptcy Court.

However, the Trustee in Bankruptcy who represents the creditors, objected on the grounds that the Homestead Exemption of 1993 was prospective and not retrospective.

Also, in two important cases, one by Judge Shiff In re Duda, 182 B.R. 662 (May 1995) and one by Judge Krechevsky In re Morgella, 171 B.R. 485 (August 1994). the courts ruled that the new Homestead Exemption was only prospective and not retrospective.

The case of In re Duda, supra, was appealed to the Federal District Court and then to the Second Circuit Court of Appeals. Also the ruling of the bankruptcy judges was upheld and confirmed. So what did that mean?

It meant that unsecured debts incurred after 10/01/1993 would be subject to the new Homestead Exemption of $75,000.00, but the new Homestead Exemption of $75,000.00 couldn’t be used to protect the Homestead from debts incurred prior to 10/01/1993. Therefore the Homestead Exemption could not be applied retrospectively.

It took many years for the old debts to become ‘new debt’ incurred after 10/01/1993 after which the Homestead Exemption was used without being challenged.

Why Did the Judicial System Rule That the New Law Couldn’t Be Used Retroactively?

Essentially the Court said that when the legislature does not specifically state that the law is retroactive, then it isn’t retroactive.

Also, there was and is a potential issue with what is called ‘ex post facto’ law—namely laws which retroactively change a contractual relationship.

In other words, you can’t make something ‘legal’ or ‘illegal’ retroactively when it pertains to a contract.

So if something is legal and a law is passed that it is now illegal, that would violate the rule against ex post facto laws.

A great example of this is the following: for example at one time it was illegal to smoke marijuana but now it’s legal going forward and you can’t go back and make it legal at the time of the original offense.

Now in all fairness, that’s the general rule and I would have to do considerable legal research to determine if there are exceptions and under what conditions can an exception arise.

A New Connecticut Homestead Exemption Has Been Enacted into Law

It goes into Effect on 10/01/2021. Just like the first Homestead Exemption, there are many questions.

For example does the new Homestead Exemption cancel the old Homestead Exemption? In other words, in claiming the Connecticut Homestead exemption and when you cite that exemption, if your unsecured debts were incurred prior to 10/01/2021, would the new Homestead Exemption not apply?

Can you claim the previous old exemption of $75,0000 if the law has been repealed in favor of the new $250,000 exemption?

The Court will be making decisions on the new Connecticut Homestead Exemption soon but until that time when there is settled law and no appeals are being taken, I would not use or cite the new Connecticut Homestead Exemption in filing a bankruptcy case either in Chapter 7 or Chapter 13.

Especially in Chapter 7 where you do not have an automatic right to withdraw, and where the Trustee could easily file a motion to object to your exemption and file a motion to sell your home.

I am taking a conservative position on the new exemption because in reviewing the history of the Connecticut Homestead Exemption, the Bankruptcy Court has case law to support the proposition that it’s too early to use the new Homestead Exemption.

Once a person’s debts were incurred after 10/01/2021, then it would be safe to use the New Homestead Exemption and until that time, it is my opinion that as a practical matter, the New Homestead Exemption is not ‘operational’.

The new homestead exemption is coming into existence but for the time being it does not really exist as a practical legal right.

Recently I saw a Memorandum of Law which was very well researched and has very cogent arguments as to why the present Homestead Exemption Law is very different from the First Homestead Exemption of 1993.

However, no bankruptcy judge as of this writing has made a ruling on the 2021 Homestead Exemption and, of course, the 2nd Circuit Court of Appeals has not heard or decided anything regarding Connecticut’s 2021 Homestead Exemption.

This leaves us in the position of the famous Chinese curse, namely, ‘may you be born during interesting times’.

Atty. Dave Falvey
Attorney David Falvey has been practicing Connecticut Bankruptcy Law for over 25 years and has helped Connecticut residents get through all their financial difficulties while helping them get their finances back on track.