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Change may cost debtors shelter

Federal bankruptcy reform could stop Florida from shielding even the priciest homes from creditors.

Personal Finance editor


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© St. Petersburg Times, published November 12, 1999

Home may not seem nearly so sweet for thousands of Floridians once Congress gets through revamping the bankruptcy law.

The reform effort is aimed at making it tougher for the wealthy to shelter their assets by buying a big house in Florida, Texas or one of the three other states that protect homes from creditors no matter how much they are worth. It has gotten a boost from tales of millionaire celebrities who poured their cash into a Florida mansion and told their creditors to take a hike.

But if the federal legislation passes, bankrupt millionaires won't be the only ones feeling the pinch. In fact, the biggest immediate impact could be on people who don't plan to file for bankruptcy at all but whose occupations leave them vulnerable to lawsuits. Under the Senate's version of the proposed reforms, any home equity of more than $100,000 suddenly would be at risk.

"There will be fewer doctors delivering babies and doing brain surgery," predicted Clearwater lawyer Alan S. Gassman, who specializes in estate planning and asset protection. "For everyone who is in bankruptcy, there are 100 people who don't sleep at night thinking about it."

While federal law governs most aspects of bankruptcy, it currently gives states the right to decide which property debtors can exempt from creditors' claims. Most states limit the home equity exemption to $60,000 or less. Florida law protects up to a half acre of property in the city and 160 acres outside it, regardless of value.

More than a few wealthy people have taken advantage of this generous Florida loophole. Actor Burt Reynolds, for example, kept a $2.5-million house while writing off $8-million in debts in his 1996 bankruptcy filing. Major League Baseball commissioner Bowie Kuhn, Wall Street trader Martin Siegel and corporate raider Paul Bilzerian all rid themselves of debt without jeopardizing expensive Florida homes. For several years the press has been speculating that O.J. Simpson might move to Florida and do the same.

One of the most striking cases of celebrity debt relief was that of Marvin Warner, who owned a horse farm in Ocala. He spent 28 months in prison for his role in the collapse of Home State Savings Bank, but through his 1987 bankruptcy filing, he managed to keep his horse farm and avoid paying $12-million in court-ordered restitution.

The bankruptcy legislation pending in Congress takes two approaches to curbing such abuses. The bill that passed the House of Representatives would put a $250,000 cap on home equity but give states the right to opt out and make their own rules. The Senate version, which passed this week, would impose a firm $100,000 cap. The differences between the two have to be worked out in a conference committee.

If the more generous version becomes law, it is likely Florida would opt out. The state Constitution protects homestead property from forced sale by creditors in most circumstances.

Even if the $100,000 limit is approved, it would not affect the majority of bankruptcy cases in Florida. That's because very few people who file for bankruptcy actually have $100,000 worth of home equity.

"When people have financial problems and they've run through their credit cards, a very easy source of money is home equity loans, so they go out and use those," said John Yanchunis, a bankruptcy lawyer with offices in Tampa and St. Petersburg. "The (well-publicized) examples that people look to as the norm are instead the extreme."

However, lawyers say a $100,000 limit on home equity protection would jeopardize many homeowners' sense of security. If they ever had to file for bankruptcy -- or were forced into an involuntary filing by creditors -- the bankruptcy trustee would have the right to sell their homes to reach any equity over the $100,000 limit.

Tampa bankruptcy lawyer Russell M. Blain said he objects to the adoption of a single dollar limit for the entire country.

"In a rural area where property values are depressed, maybe the $100,000 number is fair in most circumstances, but in urban areas, that doesn't buy much house," he said. "I have a problem with this one-size-fits-all fix."

If the $100,000 limit does become law, the immediate result might be to send many wealthy people to their lawyers to set up trusts, partnerships or corporations to hold their property and put another legal entity between them and their creditors.

"Homestead has been a very inexpensive asset protection vehicle and up until now, totally safe," said Naples, Fla., bankruptcy lawyer Charles Tatelbaum. "A $100,000 limit would curb some of the abuses, but people would come up with ways around it."

He also said there could be a legal battle over whether the federal law supersedes the protections Floridians have under the state Constitution, particularly in cases of involuntary bankruptcy.

Clearwater lawyer Gassman said limited partnerships will surge in popularity if the $100,000 limit becomes law.

"I probably have 50 to 75 clients who would do that immediately: doctors, business people, lawyers, accountants, architects," he said. Gassman said partnerships offer good protection from creditors' judgments, but cost $2,000 to $5,000 in legal fees to create and $1,000 to $2,000 a year in accounting fees and other expenses to maintain.

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