668 B.R. 661
Bankr. D.N.M.2025Background
- Debtors Dennis and Darya Romo filed for Chapter 7 bankruptcy, seeking to claim a New Mexico homestead exemption for their residence and to avoid a judicial lien held by North Mill Credit Trust (NMCT).
- NMCT had previously obtained a default state court judgment and judicial lien against the Debtors, then initiated foreclosure proceedings. The Debtors failed to assert a homestead exemption in those state foreclosure proceedings.
- The state court foreclosure decree found that the Debtors had waived any homestead exemption by not asserting it during the proceedings.
- Upon filing bankruptcy, the Debtors claimed the (increased) $150,000 per-person New Mexico homestead exemption in their property.
- NMCT and the bankruptcy trustee objected, arguing waiver of the exemption and limitation to the lower statutory amount.
- The court was asked to decide if the Debtors' prior waiver precluded their bankruptcy homestead exemption and, if not, whether the higher exemption amount applies.
Issues
| Issue | Plaintiff's Argument (Debtors) | Defendant's Argument (NMCT/Trustee) | Held |
|---|---|---|---|
| Does prepetition failure to claim homestead exemption bar bankruptcy exemption? | Not precluded; federal law allows exemption in bankruptcy even if waived in state court | Waiver in state foreclosure precludes exemption in bankruptcy | Not precluded; § 522(f) allows exemption in bankruptcy despite prepetition waiver |
| Is bankruptcy lien avoidance precluded due to state court waiver? | § 522(f) permits avoidance notwithstanding state court waiver | Waiver in foreclosure action bars lien avoidance | Not precluded; § 522(f) overrides state waiver for purpose of avoiding the lien |
| Does waiver in state foreclosure preclude exemption claim as to bankruptcy trustee/other creditors? | Waiver is limited to NMCT’s foreclosure, not other creditors or the trustee | Waiver in foreclosure action precludes all exemption claims | Waiver only applies to NMCT's lien; exemption still allowed as to trustee and other creditors |
| Are Debtors limited to the lower exemption amount in effect when foreclosure filed? | Entitled to higher exemption effective on bankruptcy petition date | Limited to $60,000 per spouse (amount when foreclosure initiated) | Entitled to claim $150,000 per spouse; bankruptcy preemption and Owen v. Owen reasoning applies |
Key Cases Cited
- White v. Stump, 266 U.S. 310 (state law determines exemption but was superseded in this context by § 522(f))
- Owen v. Owen, 500 U.S. 305 (bankruptcy courts look to exemptions the debtor "would have been entitled" to but for the lien; waiver under state law does not preclude lien avoidance under § 522(f))
- Grygorwicz v. Trujillo, 143 N.M. 704 (affirmative defense of homestead exemption is waived if not asserted in foreclosure)
- D’Avignon v. Graham, 113 N.M. 129 (homestead exemption is an affirmative defense that may be waived if not timely asserted)
- United States v. Whiting Pools, Inc., 462 U.S. 198 (ownership of property is retained until sale is confirmed, supporting debtor's interest at petition date)