Sometimes homeowners ask me about how a bankruptcy impacts their home if they have homestead exemption.
I asked Zach Shelomith over at Leiderman Shelomith (a bankruptcy firm in Hollywood) for some more information on the subject:
Most of our bankruptcy clients and prospective clients believe that their home is absolutely protected from their creditors’ claims. Generally speaking, their belief is correct. However, it is not always the case and as home prices continue to rise in South Florida, we wanted to point out some potential pitfalls relating to Florida’s “unlimited” homestead exemption.
First, a little background.
When speaking about the homestead exemption in Florida, one may actually be referring to 1 of the 3 different types of homestead exemptions under Florida law:
- Article X, Section 4(a) and (b) of the Florida Constitution, which protects your homestead from forced sale;
- Article X, Section 4(c) of the Florida Constitution, which provides restrictions on devise and alienation; and
- Article VII, Section 6 of the Florida Constitution, which provides an exemption from taxation. (The Florida property tax homestead exemption reduces the value of a home for the assessment of property taxes by $50,000.00, but the second $25,000.00 does not apply to the school portion of property taxes.)
It is Article X, Section 4 of the Florida Constitution that causes most people to mistakenly believe that their home is 100% protected from their creditors.
Section 4(a) provides that “There shall be exempt from forced sale under process of any court, and no judgment, decree or execution shall be a lien thereon…the following property owned by a natural person: a homestead…”
Homestead exemptions are only available on a person’s primary residence. It does not apply to businesses, investment properties, or second residences. If you are primarily a resident of another state and you take advantage of another state’s tax credits, you cannot utilize the Florida homestead exemption. In addition, the homestead exemptions are only available to U.S. citizens, permanent resident aliens, or other individuals who are able to form the intent to remain in the United States permanently under immigration laws.
A homestead property can include more than just a single family home. It can be a condominium, a mobile home, or a manufactured home.
Section 4(a) also provides 4 exceptions in which a creditor can force the sale of your homestead to collect a debt owed to them:
- If the State of Florida, a county within the state, or a municipality is owed past due property taxes or assessments, the entity can force the sale of your homestead.
- If a creditor is owed money for work performed in improving or repairing the property, the creditor can force the sale of your homestead.
- If you fail to pay your mortgage, your mortgage company can force the sale of your homestead.
- If you fail to pay your homeowners association fees or your condominium association fees, your association can force the sale of your homestead.
It is true that Florida’s homestead exemption is one of the broadest in the United States.
Outside of bankruptcy, the value of the home that can be protected from creditors is unlimited, so long as the home occupies no more than ½ acre within a municipality or 160 acres outside of a municipality.
However, things can drastically change once a debtor files bankruptcy.
First, under 11 U.S.C. 522(o), the value of a debtor’s interest in a homestead shall be reduced to the extent that such value is attributable to any portion of any property that the debtor disposed of in the 10-year period ending on the date of the filing of the bankruptcy petition with the intent to hinder, delay, or defraud a creditor and that the debtor could not exempt.
Basically, a debtor in bankruptcy may not claim as exempt his homestead, or any portion of his homestead, that was purchased with non-exempt assets and actual fraudulent intent to hinder, delay, or defraud a creditor. That is a very scary concept to a client or a prospective client who has been made to believe that his or her homestead exemption is bulletproof. It is even scarier to think that a trustee can look back 10 years to see where the debtor obtained the money to purchase and/or add equity to his/her homestead.
Since 2008, this really hasn’t been an issue. Not many properties in South Florida had enough equity for this section to be a concern (it is the equity in a property that a trustee will try to get at so it can be distributed to the creditors in a bankruptcy). However, as the foreclosure rates continue to drop (according to CoreLogic, the foreclosure rate in the greater Miami area fell to 6.6% in June 2014, its lowest level since the real estate crash), and home prices continue to rise (according to a recent article in the Miami Herald, the median price of an existing single-family home in Broward County rose 5.7% to $280,000.00 in June 2014 from June 2013), more and more debtors will be heading into bankruptcy with homesteads that will have significant amounts of equity.
Bankruptcy trustees are salivating.
A debtor who has acquired a homestead within the last 10 years that has a substantial amount of equity should be asked a number of questions to determine his/her intent at the time of the purchase or pay down of his/her homestead:
- Was the debtor being sued at the time of the purchase or transfer?
- Was the purchase made or did the transfer occur after a judgment was entered against the debtor?
- Did the debtor use substantially all of his/her assets to make the purchase or transfer?
- How close in time to the filing of the bankruptcy did the purchase or transfer occur?
Second, under 11 U.S.C. 522(p), a debtor may not exempt any amount of interest in a homestead that was acquired by the debtor during the 1215 days (about 3 1/3 years) before the bankruptcy petition was filed that exceeds $155,675.00.
This section was enacted to close a loophole in which wealthy debtors could protect large amounts of money from creditors by filing bankruptcy after converting non-exempt assets into exempt homesteads in states like Florida, which have unlimited homestead exemptions. It doesn’t limit interests obtained more than 1215 days before bankruptcy or amounts that can be demonstrated to have been rolled over from a homestead owned in Florida more than 1215 days before the bankruptcy filing. Plus, even if the cap applies, it still allows each debtor to protect $155,675.00.
Again, this section has not really been a concern since 2008. However, it should become more of a concern as property values continue to increase.
If you are considering filing bankruptcy, and you own a homestead with equity, it is imperative that you consult with bankruptcy counsel to discuss the ramifications of 11 U.S.C. 522 (o) and (p) before you file so that hopefully your home can truly remain your castle.
For further information Zach Shelomith can be reached at 954-920-5355 or zshelomith@lslawfirm.net.