Fla. door may shut on debtors

Bankruptcy legislation passed by the Senate would put sharp limits on residents of other states.

Published March 11, 2005

Florida's days as a debtor's haven may be nearing an end.

Bankruptcy legislation the U.S. Senate passed Thursday would sharply limit the ability of residents of other states to shelter assets through Florida's unlimited homestead exemption by purchasing a home in the state just before filing for bankruptcy.

That's just one small aspect of a major bankruptcy overhaul aimed at making people pay back more of their debts.

Long sought by business interests, the rewrite of federal bankruptcy law passed the Senate 74-25 and may be taken up by House committees as early as next week. Both of Florida's senators, Republican Mel Martinez and Democrat Bill Nelson, voted for the bill.

If the bill becomes law, many people now eligible to wipe out debts through bankruptcy will be required to enter multiyear repayment plans to get any help from the court with their debts.

"It's a sad day for debtors," Clearwater lawyer Alan Gassman said.

Because bankruptcy protections vary from state to state, those with unlimited homestead exemptions such Florida and Texas became attractive to high rollers contemplating a bankruptcy filing. The Florida Constitution protects up to half an acre of land in the city or 160 acres outside city limits.

Celebrities such as actor Burt Reynolds and former Major League Baseball commissioner Bowie Kuhn drew media attention by filing for relief from creditors while holding onto million-dollar Florida homes.

Now, people can file for bankruptcy after living in a state for only six months. The Senate bill would move that residency requirement to two years and limit the homestead exemption to $125,000 if the property is owned for less than three years and four months.

"This is an extension of federal power that has not previously been exercised," said Florida State University law professor Adam Hirsch in Tallahassee. "Historically, the rule has been that the federal bankruptcy code has granted debtors all the exemptions that they get at state law."

In Florida, homestead property is protected from seizure by creditors who get a judgment in state courts, and such property has been classified as an exempt asset in bankruptcy court no matter how much it's worth.

The latest bill would change only the second protection.

"If you were in debt collection in state court, you could still be fully protected," said John Cooper, an associate dean of Stetson University College of Law in Gulfport. "But under the U.S. Constitution, the federal government is supreme in the area of bankruptcy laws."

The bankruptcy legislation also puts a $125,000 cap on home equity protection for people who have lived in their homes longer than 3.3 years but who owe debts related to securities fraud and "reckless misconduct" causing physical injury or death within the previous five years.

The limit on home equity will not impact many bankruptcy filers, said U.S. Bankrutpcy Judge Michael Williamson in Tampa.

"For the average person in financial difficulty, (that provision) will not change anything," he said. "Most people who file for bankruptcy don't have big houses and don't have much equity."

However, he said, the law will curb the rare case of abuse.

"It will close the ability of someone to sell assets in Michigan and buy the $2-million house on the Florida coastline, but it's certainly not going to change what I do every day."

The biggest change in the proposed law is the requirement that many middle-income and upper-income debtors go through a Chapter 13 repayment plan rather than being allowed to wipe out their debts in a Chapter 7 filing.

"It will make it a more complicated process to file bankruptcy," Williamson said. "I hope it will have benefits in terms of repeat filers, but it won't solve the cause of the financial problems. Those will continue to exist. People will still lose jobs, have divorces and have medical problems."

Lawyer Gassman said the repayment requirement will cause difficulty for his clients, many of whom are physicians who file bankruptcy after being hit with jury awards not covered by malpractice insurance. He expects it will prompt more doctors to leave Florida for other states where malpractice insurance is more available and more affordable.

The bankruptcy bill does not stop wealthy people from using so-called asset protection trusts, which have long existed offshore and are now legal in five states. People can set up trusts in the states (Alaska, Delaware, Nevada, Rhode Island and Utah) even if they don't live there.

"Debtors won't need to buy houses in Florida or Texas to keep their millions," said Elena Marty-Nelson, a law professor at Nova Southeastern University in Fort Lauderdale.

However, Gassman said, he is reluctant to recommend those trusts to his clients because the creditor protection is available only if they give up control of their assets.

The changes in the bankruptcy code take away some of the advantages Florida has had, but the state still has its attractions for debtors who aren't in a hurry to file.

"Even if you leave the exorbitant mansions out of it, there will still be benefits for living in Florida," said Theresa Radwan, associate dean at Stetson. "The $125,000 is still a significantly higher exemption than is given in some other states and someone who was really planning way ahead could move to Florida and wait four years to file."

- Helen Huntley can be reached at huntley@sptimes.com or 727 893-8230.


Key features of Senate legislation to overhaul the U.S. bankruptcy laws.

If enacted, the bill would:

Set up a new test for measuring a debtor's ability to repay. People with insufficient assets or income could still file a Chapter 7 bankruptcy, which if approved by a judge erases debts entirely after certain assets are forfeited. But those with income above the state's median income who can pay at least $6,000 over five years - $100 a month - would be forced into Chapter 13, where a judge would order a repayment plan.

Under current law, a bankruptcy judge determines under which chapter of the bankruptcy code a person falls - whether they have to repay some or all of their debt.

Require people filing for bankruptcy to pay for credit counseling. Give top priority to a spouse's claims for child support among creditors' claims on a debtor in bankruptcy.

Allow for special accommodations for active-duty service members, low-income veterans and those with serious medical conditions in the new income test for bankruptcy applicants.

Restrict the homestead exemption in states to $125,000 if the person in bankruptcy bought his or her residence less than three years and four months before filing. Florida, Iowa, Kansas, South Dakota and Texas have unlimited homestead exemptions that allow wealthy people to file for bankruptcy and keep their mansions in those states sheltered from creditors.