Can I file for bankruptcy if I use my home for AirBNB?
Filing for bankruptcy as a homeowner can be a frightening thought because, well, you don’t want to lose your home. Especially if your home produces income, such as with AirBNB, can you file for bankruptcy?
Financial problems hit everyone – those that are single, those that are married, those that are healthy, those that are battling illness, those that are employed, those that are unemployed. Homeowners, as well, regularly face financial issues.
Many homeowners, if their space provides for it, use their home to produce income, such as through renting. Increasingly, homeowners are turning to short-term rental services, such as AirBNB, to produce income from their homes without the issues that may present from long-term rentals.
For a homeowner thinking about filing for bankruptcy, often the primary concern is to make sure that the home remains protected. Then, can a homeowner that does AirBNB file for bankruptcy and protect the house?
Facts of the Case
This case comes out of the Bankruptcy Court for the District of Massachusetts. In this case, a husband and wife couple filed a chapter 13 case. They owned several pieces of real estate, including their primary residence, which was a two-family home. The house was worth about $195,000.00, with a mortgage against the property of $162,125.00. The debtors also claimed the Massachusetts Homestead exemption (which protects equity in the property in a bankruptcy case) of $500,000.00.
Additionally, and importantly in this case, a creditor held a judgment of over $965,000.00 against the husband and a business that he ran from the home.
The Arguments of the Parties
During their bankruptcy case, the debtors filed an adversary proceeding to avoid the $965,000.oo lien against their house. (Avoiding a lien means “stripping” it off as a lien from the property. If a debtor is successful in stripping a lien, that debt is no longer secured and remains an unsecured debt.) The judgment creditor objected, arguing that because the debtors used the house for AirBNB, it was being used for commercial purposes, while the homestead exemption only provides protection for residences.
The debtors argued, on the other hand, that while they did use the house for commercial purposes, it wasn’t as much as the judgment creditor made it out to seem. Still further, the debtors argued that, notwithstanding the amount of commercial activity taking place at the home, it doesn’t matter because the homestead exemption can be used as long as it is the debtor’s home, regardless of any commercial activity taking place on the property.
The Court’s Analysis
First, the court looked to the Massachusetts exemption law to see what kinds of properties it applies it and found that the homestead exemption does apply to the kind of property in question, a two family house. Additionally, the court found that the law applies to homes used by a debtor or intended to be used by a debtor as their primary dwelling.
Next, the court turned to determine whether commercial use that takes place in a home can preclude the application of the homestead exemption and, if so, what factors make a home residential versus commercial. The court found one prior case that found that, in some cases, there may be so much commercial use taking place on a property that it may lose homestead protection, and that would require a case by case inquiry.
This court decided not to follow that older case because it found that there was nothing in the actual statute that imposed a predominant use requirement. That is, as long as a debtor is using a property as their primary residence, it qualifies for the homestead exemption, regardless of how much commercial activity may be taking place on the property. Therefore, since the property qualified as the debtors’ primary residence, the court granted the debtors’ motion to avoid the creditor’s judicial lien against the house. In re Shove, 17-31052-EDK (Bankr. D. Mass., May 29, 2018).
Most bankruptcy courts, as a matter of public policy, liberally construe exemption laws to favor debtors. In this particular case, the debtors were able to file their bankruptcy and remove a $965,000 judgment lien against their house. It didn’t matter that they were running an AirBNB from it, because the exemption law is applicable regardless of how much or how little commercial activity, if any, was taking place on the property.
If you would like to discuss your bankruptcy case, feel free to contact the Law Office of Richard Kistnen!
Law Office of Richard Kistnen
128-22 Rockaway Boulevard
South Ozone Park, NY 11420
Tel.: (718) 738-2324