Mansion owners won't be able to dodge creditors in Florida anymore
A sweeping overhaul of the nation's bankruptcy laws will make it harder to avoid paying creditors and gut a long-standing Florida exemption that protects homes from being sold to pay off debts.
The legislation, which was passed by Congress Thursday, is considered the biggest rewrite of the bankruptcy code in a quarter-century.
It will also make Florida less appealing to wealthy debtors seeking to dodge creditors by buying big mansions. Florida is one of five states with an unlimited "homestead exemption" that allows residents who declare bankruptcy to keep their homes, no matter how much they owe.
If enacted, the law would pre-empt and modify that exemption in bankruptcy cases in Florida and other states. It would cap the exemption at $125,000 if the person in bankruptcy bought the house less than three years and four months before filing.
On Thursday, a 302-126 vote by the House sent the legislation to President Bush, who said he was eager to sign the measure. The legislation cleared the Senate last month on a 74-25 vote.
After eight years of strenuous efforts by congressional backers, banks and credit card companies, the legislation was catapulted toward enactment earlier this year. The measure would require people with incomes above a certain level to pay credit card charges, medical bills and other obligations under a court-ordered bankruptcy plan.
The change is expected to make it difficult for tens of thousands of people to wipe out their debts in bankruptcy court. Many of those people will be shifted toward repayment plans, experts say. Nationally, an estimated 1.1 million filed for personal bankruptcy last year, including 84,706 Floridians, according to the American Bankruptcy Institute.
Opponents say the change would fall especially hard on low-income working people, single mothers, minorities and the elderly and would remove a safety net for those who have lost their jobs or face crushing medical bills.
The legislation "protects the credit industry at the expense of the consumer," Rep. Alcee Hastings, D-Fla., declared in House debate. "It will drive more Americans deeper into financial crisis and weaken the nation's economy and social structure."
In Florida, the legislation is expected to prompt a surge of personal bankruptcy filings over the next week among residents who are in deep debt and want to protect their homes from creditors before the legislation is enacted. President Bush could sign the legislation as early as next week.
The limitation on the homestead exemption means creditors could seize every dollar above the $125,000 threshold should a debtor be forced to sell.
This would represent "a major shift" for Florida's residents who have long had their homes shielded from creditors, said Michael Goldberg, a bankruptcy attorney at Akerman Senterfitt in Fort Lauderdale.
Still, Floridians will be able to shield homes from creditors under several scenarios, even if the bankruptcy legislation is enacted, Goldberg said.
For example, Floridians who have owned their homes for 40 months or longer will be able to keep their unlimited homestead exemption. Floridians who file for bankruptcy before the President signs the legislation will also be able to keep the unlimited exemption. And married couples -- in cases where only one partner is bankrupt -- will be able to shield their home under a different exemption, Goldberg said.
Florida's recent and future homebuyers, however, will lose the homestead's unlimited protection in bankruptcy cases, he said.
That would puncture an exemption that critics say has provided a way for the rich to shelter money through their multimillion-dollar estates. Actor Burt Reynolds, and former Major League Baseball commissioner Bowie Kuhn, are among those who have had their estates protected by Florida's homestead exemption. The exemption was written into Florida's constitution more than 100 years ago to protect the tiny homesteads of poor settlers struggling to pay their debts.
Nationally, the legislation's backers in Congress and the financial services industry argue that bankruptcy frequently is the last refuge of gamblers, impulsive shoppers, divorced or separated fathers avoiding child support,and multimillionaires -- often celebrities -- who buy mansions in states with liberal homestead exemptions to shelter assets from creditors.
Most legislation would take effect six months after its enactment. The measure would set up an income-based test for measuring a debtor's ability to repay debts. Those 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.
Those with income above their 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 then order a repayment plan.
The legislation also would require people in bankruptcy to pay for credit counseling.
South Florida credit counselors, including Howard S. Dvorkin, founder of the nonprofit Consolidated Credit Counseling Services in Fort Lauderdale, said the legislation is overdue.
"There are too many people taking advantage of the law as it exists," he said. "They're shedding the responsibility of paying their bills. The stigma of being bankrupt has evaporated."
Forcing the debt-ridden into counseling could do a lot of good, said Shelby Henderson, who filed for bankruptcy five years ago after becoming ill, losing her job and accruing $50,000 in debt. Since then, the Margate resident has had trouble trying to refinance her mortgage.
Now a credit counselor, Henderson, 26, said she would have benefited from learning simple skills, such as household budgeting and consolidating debt at lower interest rates. "Had I known that, I wouldn't be suffering right now."