June 2009 Vol. 2, No. 6
 

Of Note

Federal
Homestead

In re Belcher, 551 F3d 688 (7th Cir 2008)

Facts:Keith and Katherine Belcher married, purchased a home, and were both titled on the property. The Belchers subsequently divorced; Keith quitclaimed his interest to Katherine. The Belchers later remarried and Keith lived in the home, contributed to the mortgage and upkeep of the house, and put the homeowner's insurance in his name. However, Katherine remained the sole owner on the title.

In October 2005, the Belchers filed for bankruptcy. The trustee sold the marital home to satisfy the Belchers' debts. Keith and Katherine each claimed a separate $7,500 homestead exemption under 735 ILCS 5/12-901, which provides a $7,500 estate of homestead to "[e]very individual" who "owned or rightly possessed by lease or otherwise" a piece of property occupied as a residence. Katherine received her exemption, but the trustee objected to Keith's claim.

Discussion:The Belchers and the trustee disagreed on the implications of the term "otherwise" in the statute. The Belchers claimed that although Keith did not own the house, as a nontitled spouse he had a potential equitable interest that constituted possession "otherwise." That equitable interest would be recognized under Illinois' divorce laws or the Illinois Probate Code if the couple divorced or Katherine died. See 750 ILCS 5/503(b)(1), 755 ILCS 5/2-1 and 5/2-8.

The Belchers cited two laws for support. First, the Rights of Married Persons Act, 750 ILCS 65/16, prevents one spouse from removing the other from a homestead without providing another suitable homestead. Second, the Release of Homestead Act, 765 ILCS 5/27, states that "[n]o deed or instrument" can waive a spouse's homestead rights unless it expressly purports to do so, and such a waiver only binds the other spouse if the other spouse joins the waiver. The Belchers asserted that these provisions recognize a property interest for a spouse in Keith's position.

The trustee asserted that "owned or rightfully possessed by lease or otherwise" merely recognizes formal possessory property interests, like life estates, that are neither fee title ownership nor leases. Therefore, some formalized property interest is necessary to claim the homestead exemption. Because Keith was merely in possession of the house and not on the lease, he could not claim the exemption.

The Bankruptcy court found for the Belchers and the United States District Court for the Southern District of Illinois affirmed.

Holding:Reversed. Lower federal courts in the Seventh Circuit are divided on how to employ the homestead exemption. The Court of Appeals sided with those courts that refused to recognize a potential future interest as a qualification for using a homestead exemption. It held that neither the Rights of Married Persons Act nor the Release of Homestead Act recognize any original property right for a nontitled spouse, but rather strengthen one spouse's existing rights against the other spouse. Therefore, if a spouse has no property right relative to a third-party, such as a creditor, these statutes do not create one. The court held that Keith had no such right, because under the court's interpretation of Illinois precedent and the Illinois General Assembly's Act of December 14, 1994, Pub Act No 88-672, &§ 25, 1994 Ill Laws 2649, mere occupancy without a formalized interest is insufficient to trigger the homestead exemption.

[Last update: 6-11-09]