STATE HOMESTEAD EXEMPTIONS AND THEIR EFFECT ON FEDERAL BANKRUPTCY LAWS
Real Property, Probate and Trust Journal, Spring 2004 by Rivera, Ryan P
Editors' Synopsis: This Article contains an overview of the history of the federal bankruptcy law and the federal homestead exemption. The author argues that varying state homestead exemption laws have created a chaotic and nonuniform system, and he discusses recent proposals to amend the federal exemption that will produce greater uniformity.
An aphorism, paraphrased, is that "a debtor's homestead exemption is his castle."1 The significance of this aphorism should not be disregarded because lawmakers have linked the collapse of Enron Corp. to the homestead exemption.2 The exemption permits debtors in bankruptcy to keep expensive homes out of the hands of creditors.3 Texas, where Enron Corp. is located, allows homeowners to protect the full value of their homes in bankruptcy.4 As a result, Texas's homestead exemption protects several former Enron Corp. executives with multi-million-dollar mansions who might find themselves forced into bankruptcy by shareholder lawsuits or criminal charges.5
What is the homestead exemption? It comprises two elements: the homestead and the exemption. Homestead signifies a dwelling house with customary appurtenances and includes outbuildings that are necessary for use where the family resides.6 The second element, the exemption, "[I]s an interest of the debtor carved out of the bankruptcy estate for the benefit of the debtor and thereby shielded from creditors' claims."7 The exemption provides the debtor with an asset that he can remove from the prebankruptcy estate to aid in the debtor's postbankruptcy rehabilitation.8 However, the homestead exemption is generally not available when a mortgage or other security interest is attached to the residential premises that a debtor seeks to exempt.9
In five states the aphorism is particularly accurate. In addition to Texas, four other states allow homeowners to protect the full value of their home in bankruptcy. Florida, Iowa, Kansas, and South Dakota have adopted homestead exemptions that authorize debtors to protect an unlimited amount of equity from the claims of creditors. Unlike the five states just identified, homestead exemptions in the remaining forty-five states are considerably different because they impose some form of dollar limitation upon the debtor's exemption. While the majority of states have homestead exemptions that limit the dollar amount of equity a debtor may exempt, the dollar limitations that have been adopted are noticeably different.
Many states have constitutional or statutory exemptions that effectively negate any notion that "a debtor's homestead exemption is his castle."10 Consequently, the accuracy of the aphorism depends on the debtor's residency at the time of his bankruptcy filing. Even states within a similar geographic region have homestead exemptions that are afforded disparate treatment in federal bankruptcy proceedings. Despite this disparity, the homestead exemption's fundamental purpose of providing debtors with a source of protection in bankruptcy has remained constant since the mid-nineteenth century. The principal objective of the homestead exemption in the early twentieth century was to provide security for the family. The security afforded to the debtor's family provided a community benefit "to the extent that such security prevented] pauperism and provid[ed] the members of the family with some measure of stability and independence."12 Today, the principal objective of the homestead exemption is to secure a home for the householder.13 While the exemption is no longer exclusively focused on protecting the debtor's family, the exemption still has the same effect of providing debtors with a source of protection in bankruptcy.
In 1960, Professor Countryman stated one notable characteristic of state exemption laws is their extreme variety.14 This characteristic accurately describes the current condition of state homestead exemptions. While Florida, Texas, Iowa, Kansas, and South Dakota provide unlimited homestead exemptions, Delaware provides debtors with no homestead exemption whatsoever.15 Virginia's homestead exemption is exceptionally limited, providing debtors with a meager exemption of five thousand dollars.16 In addition to Virginia and Delaware, twenty other states have exemptions of fifteen thousand dollars or less.17 Besides the dollar limitation differentials, other peculiarities and unique priorities exist among state homestead exemptions.18 It has been stated that "[t]he only uniformity . . . found with respect to state exemption laws . . . is the universal academic discontent with the current condition of the law."19 Part I of this Article focuses exclusively on state homestead exemptions and will address different policies in various states.
Part II of this Article examines the history of federal bankruptcy and the federal homestead exemption. The classic goals of bankruptcy have been twofold: (1) to provide debtors with a "fresh start" from crushing debts, and (2) to ensure that creditors receive an equitable share of the debtor's bankruptcy estate.20 Accomplishing both of these objectives, while simultaneously enabling states to have control over their exemption laws, has produced a chaotic system of nonuniformity. It has been suggested that state homestead laws have resulted in a lack of equity and reasonableness. While this suggestion can be debated, it is indisputable that state homestead laws are far from uniform, and the "opt out" provision in federal bankruptcy has created the lack of uniformity that exists today.
Part III of this Article will dissect recent proposals to amend the federal exemption and produce uniform treatment of the homestead exemption in federal bankruptcy proceedings. Since 1994, Congress has proposed amendments to the federal exemption in an effort to create a uniform dollar limitation on the exemption that would apply to debtors in every state. However, the proposed amendments have been unsuccessful and our current scheme remains devoid of uniformity. Part III concludes with an alternative proposal that will minimize the incentive for individuals to relocate in a state with a generous exemption before filing for bankruptcy.
II. STATE HOMESTEAD EXEMPTIONS
"Although bankruptcy is federal law the rights in bankruptcy of debtors and creditors are governed in large part by rights under applicable state law."21 Therefore, to understand federal bankruptcy law and the treatment of the homestead exemption in federal bankruptcy proceedings, first it is important to consider the history and development of state homestead laws.
Homestead legislation appears to be a uniquely American contribution to the law of real property. The origins of homestead legislation can be traced to a statute of the Republic of Texas enacted in 1839.23 While many states have embraced similar policies, such as liberally construing state statutes in the debtor's favor, our current system has produced inconsistent treatment of state homestead exemptions in federal bankruptcy proceedings.24 Most states have imposed some type of dollar limitation upon the property being claimed as a homestead. An acreage restriction often accompanies the dollar limitation, which may vary considerably depending on whether the homestead is urban or rural.25
A. State Homestead Exemptions: The Nineteenth Century
State homestead exemptions emerged in the mid-nineteenth century when states were embracing the policy that holders of a possessory interest in land should receive at least marginal protection from their creditors.26 The first state homestead exemptions provided debtors with absolute necessities, such as bedding, clothing, and tools of the trade.27 But after the economic depressions during the eighteenth and nineteenth centuries, many state legislatures began granting more extensive exemptions-excluding even more assets from creditors than were covered by the early exemptions.28 During the mid to late-nineteenth century, the primary policy behind most state homestead statutes was to protect certain real property of the debtor, thereby preserving the home for the family.29 By 1874, twenty-five states had adopted homestead laws.30 Nine of these state homestead laws were constitutional provisions and the remaining homestead exemptions were legislative.31 Distinguishing between constitutional and statutory provisions was important during the nineteenth century and remains important today. Reforming constitutional provisions is a burdensome process that is substantially more difficult than promulgating new statutory law.32
State homestead statutes in the nineteenth century protected the debtor's children from being "turned out into the world by a stroke of unmerited misfortune" when they were too young to survive without adequate shelter.33 During this time, the right to claim a homestead exemption terminated with the death of the head of the family or minority of the youngest child.34 Many believed that by the time the youngest child reached the age of majority, the objective of providing children with shelter was accomplished; the children were then to seek homes of their own.35
State exemption statutes no longer require a debtor to have dependents or to be the head of family to protect certain real property under the homestead exemption. In addition to protecting certain real property of the debtor, states embraced other policies that are debtor-oriented. State exemption schemes may serve any of the following social policies:
(1) To provide the debtor with property necessary for his or her physical survival;
(2) To protect the dignity and the culture and religious identity of the debtor;
(3) To enable the debtor to rehabilitate himself or herself financially and earn income in the future;
(4) To protect the debtor's family from adverse consequences of impoverishment; and
(5) To shift the burden of providing the debtor and his or her family with minimal financial support from society to the debtor's creditors.36
These five social policies are not exclusive, and the following Section examines additional policies.
B. Comparison of the Policies: Current and Historical Applications
Even though many states have embraced similar social policies, the protection afforded debtors in the fifty states lacks any notion of uniformity. The following analysis examines policies that have been embraced in Colorado, Ohio, Minnesota, South Carolina, and Illinois. These states are considered because they limit the amount of equity debtors may exempt, and they have endorsed different policies in an effort to validate their exemptions. This Section also examines how different states have handled specific issues that arise under state homestead statutes.
In the late nineteenth century, the Supreme Court of Colorado recognized that two governing principles underlie all homestead legislation: (1) protecting the citizen householder and his family; and (2) the "public policy of securing the permanent habitation of the family, and cultivating the local interest, pride, and affection of the individual, so essential to the stability and prosperity of a government."37 While Colorado's policy of protecting individuals and the family is favorable for debtors, the state's construction of the exemption has unfavorable results for creditors. "It has long been the policy of [Colorado] to preserve the home to the family, even at the sacrifice of just demands, for the reason that the preservation of the home is deemed of paramount importance."38 Despite Colorado's debtor-oriented policy, the homestead property right39 is not absolute because Colorado enables debtors to waive their right to the homestead exemption.40
In the late nineteenth century, the Colorado Supreme Court stated that "[t]he homestead exemption extends certain protection to the premises set apart by the owner as a homestead . . . It protects [the premises] against proceedings by execution and attachment. . . ."41 By protecting a debtor's premises, "the statute [becomes] a shield against misfortune occasioned by debt."42 But the Colorado Constitution does not explicitly designate what will constitute a homestead; homestead and exemption laws are products of legislation and "[t]heir extent and limitations must be ascertained from the legislative act."
The debtor's intent to occupy real property as a home is not sufficient to obtain the benefits of the homestead exemption.44 But when the debtor owns and occupies real property as a residence at the time of the bankruptcy filing, the debtor will be entitled to claim the homestead exemption. The debtor can claim the exemption even if he is in the process of moving out and has contacted a moving company prior to filing for bankruptcy.45
Colorado's exemption follows the majority of state statutes by limiting the equity that a debtor can protect from creditors' claims. Dating back to its enactment in 1868, the Colorado exemption has contained a dollar limitation that limits the equity a debtor may exempt in bankruptcy.46 In 1868, the Colorado statute extended to debtors the privilege of holding a homestead to the extent of two thousand dollars to be exempt from execution and attachment.47 The current statute in Colorado provides that every homestead shall be exempt from execution and not exceed in value the sum of forty-five thousand dollars in actual cash value that exceeds any liens or encumbrances on the existence of the homestead property.48
Historically, the purpose of Ohio's homestead exemption, like Colorado's exemption, has been to preserve the home for the benefit of the debtor's entire family.49 During the nineteenth century, the "the head of a family" could receive a sum not to exceed five hundred dollars "in lieu of homestead," which by the language of the statute did not extend to a debtor who had ceased to be the head of household.50 Today, every person who is domiciled in Ohio has a right to hold property exempt from the claims of creditors.51 While the requirements to qualify for a homestead exemption have changed, Ohio has failed to increase adequately the dollar amount of its exemption and continues to provide debtors with very little financial support for their fresh start.52
The debtor's intent to occupy his residence is a necessary element to establishing an allowable homestead exemption.53 Furthermore, the debtor's failure timely to claim the exemption constitutes a waiver of the homestead exemption.54 However, in an effort to construe the exemption liberally, Ohio courts have limited the methods by which a debtor may waive his exemption rights. In the early twentieth century, the Supreme Court of Ohio determined that in the case of an executory contract, a waiver of the homestead exemption is void as against public policy.55
Notwithstanding Ohio's liberal construction, the state has established boundaries to pre-empt debtors from abusing and manipulating their rights to the homestead exemption. In Aultman, Miller & Co. et al. v. Wilson, the debtors were husband and wife who were also engaged in a partnership.56 Under partnership law at the time, the husband and wife were personally liable for the payment of partnership debts, and only allowable exemptions could limit liability.57 The debtors argued that a different rule should apply because the relation of husband and wife existed between the members of the insolvent partnership, and both husband and wife owned the property and had a right to claim the homestead exemption.58 The debtors' argument was rejected because the policy of the homestead exemption was not to exempt property owned and used in the partnership's business for profit.59 Despite efforts to restrict abuse of the exemption, Ohio continues to be one of many states that should be admonished for its failure to provide debtors with a meaningful exemption.
The Minnesota statutes provide the following definition of the homestead: "The house owned and occupied by a debtor as the debtor's dwelling place, together with the land upon which it is situated . . . shall constitute the homestead of such debtor and the debtor's family. . . ."60 In 1932, Chief Justice Wilson, writing for the Supreme Court of Minnesota, stated that the court could see no justification for excluding "the vicious, the criminal, or the immoral" from the homestead exemption's protection.61 He went on to state that the exemption considered the family to be of utmost importance and that the state's policy "sounds in hope for the future both as to the debtor and his children."62
The Supreme Court of Minnesota also established in the early twentieth century that "homestead property may be used for various commercial purposes as well as for residence purposes."63 Specifically, the Supreme Court of Minnesota agreed with the Supreme Court of Alabama64 that the satisfactory rule, which conserves all of the rights which the homestead law was intended to protect, was that a portion of homestead property may be leased for a period as short as six months so long as the lease "does not interfere with the comfortable use of the property as a homestead."65 Thus, a Minnesota debtor may be entitled to the exemption even though a tenant under a short-term lease occupies a portion of the homestead property.
Until 1993, Minnesota's homestead exemption did not have a dollar limitation.6'' Originally a proposal in the mid-nineteenth century suggested that the Minnesota Constitution contain a homestead exemption with a specific dollar limit, but the proposal never was adopted. In 1993, Minnesota amended its statutory exemption and imposed a limitation of two hundred thousand dollars for homestead property not used for agricultural purposes.68 Minnesota's sizeable dollar limitation is instrumental in realizing the exemption's purpose-"to allow debtors to retain their family home as a safe harbor."69
Minnesota's homestead exemption promotes social policies. The Minnesota Supreme Court noted that the "exemption provisions provide for and protect a debtor's fundamental needs by limiting the assets available for distribution to creditors."70 Because securing the home is deemed to be of overriding importance, Minnesota has recognized the debtor's home to be a sanctuary, notwithstanding the demands of creditors that seek to recover their debts.71 The exemption is premised on the expectation that a debtor's fresh start will be advantageous for the state's local economy. The belief is that by enabling debtors to retain their homes, which are their most valuable asset, they will have the financial capability to put money back into the local market.72 In particular, the Supreme Court of Minnesota has stated that debts are more likely to be paid by individuals "whose connections with the community are stabilized by a protected interest in a relatively permanent place of abode than by those not so anchored."73
Despite the liberal application afforded to Minnesota debtors, the exemption limits specific items from the security afforded by the homestead exemption in bankruptcy. Debtors abandon their homestead right when two basic components have been shown: cessation of occupancy and lack of intent to return.74 Furthermore, the exemption does not protect land that is noncontiguous with the parcel of land on which the home is situated.75 To qualify for the homestead exemption, contiguous parcels "should be so connected that they can be used as one tract."76
Despite the abovementioned limitations, Minnesota courts have manifested an intention to protect debtors. The policy embraced in Minnesota is that a debtor's homestead provides a safe harbor. Minnesota's liberal construction of the exemption often allows debtors to retain their sanctuary in bankruptcy. Even when the debtor's homestead has a mixed use, and the debtor uses the homestead for residential and commercial purposes, the debtor still may be entitled to protect his homestead under the exemption.77
4. South Carolina
The homestead exemption, which the 1868 South Carolina constitution initially adopted, was established as support for the family of an insolvent debtor.78 Today, under the common law of South Carolina, "the homestead exemption inures primarily to the benefit of the debtor and only derivatively to dependent children."79 The purpose of South Carolina's homestead exemption is well established: it "protect[s] from creditors a certain portion of the debtor's property," and prevents debtors from becoming entirely "dependent on the State for [financial] support."80
The current statute provides an exemption of five thousand dollars for property the debtor uses as a residence.81 South Carolina's objective of providing debtors with adequate resources for a fresh start appears to be the driving policy behind its five thousand dollar limitation, and thus closely resembles the objective in Ohio, which also provides its debtors with a meager exemption of five thousand dollars. The statute's right of exemption "is nothing more than a prohibition against the use of the process of the courts for the collection of debts in certain cases. . . ."82 Unfortunately, the right of exemption provides little financial support for South Carolina debtors and virtually ensures that debtors will lose their homes in bankruptcy.
South Carolina liberally construes its homestead exemption for the protection of its debtors. In the late nineteenth century, the Supreme Court of South Carolina in Chafee & Co. v. Rainey considered what conditions must exist for debtors to qualify as a head of household for purposes of the homestead exemption.83 The court stated that when debtors become the heads of families they are placed in a position in which the state constitution forbids the use of process of the courts in selling a certain portion of the debtors' homestead to satisfy their debts.84 In liberally construing the statute to afford the debtor with his statutory protection, the court stated that the classification as a homestead is not inherently unfair to creditors.85 Creditors know that when their debts are contracted and the judgments are recovered they cannot be enforced against the debtor's homestead, and creditors are presumed to have extended credit with that understanding.86
The South Carolina Court of Appeals recently effectuated this policy of liberal construction when it considered whether an incarcerated debtor had abandoned his homestead.87 South Carolina's treatment of abandonment closely resembles the treatment afforded this issue in Minnesota, which has heightened requirements for proving that debtors have abandoned their homesteads. South Carolina courts consider the act and intent of the debtor as the determining factors; the courts do not consider the duration of residence.88 In reaching its decision that the debtor did not intend to make the detention center his principal residence, the court stated that a contrary holding would "thwart the underlying policy of the homestead exemption."89 Thus, even though the debtor was incarcerated and unable to return to his homestead, he was entitled to the exemption because the debtor did not intend to transfer his permanent residence to the detention center.90
In the mid-nineteenth century, the Illinois legislature recognized the need for debtor protection and established the Homestead Act of 1851 ("1851 Act"), which "provided that the lot of ground, and the buildings thereon, occupied as a residence and owned by the debtor, should be exempt.91 The objective of the 1851 Act was to secure the head of family with possession of the homestead and the shelter it provided for the head of the family.92 The 1851 Act contained an important provision regarding waiver, providing that "no release or waiver of such exemption shall be valid, unless the same be in writing, subscribed by such householder, and acknowledged."93 The amendatory Homestead Act of 1857 further restricted a debtor's ability to waive his rights to the exemption, requiring any waiver to be signed by the wife as well as the husband.94
The Homestead Act of 1872 ("1872 Act") resolved the 1851 Act's draconian treatment of proceeds from the voluntary sale of a debtor's homestead. Ten years later, the Supreme Court of Illinois determined in Watson v. Saxer that tenants holding a leasehold interest were entitled to homestead rights in the premises to the value of one thousand dollars.95
Illinois's homestead exemption has been amended and liberally construed to provide debtors with a source of protection from the claims of creditors. In Holterman v. Poynter, the Supreme Court of Illinois considered whether the debtors had abandoned their homestead by moving from their home into a farm located in a neighboring county.96 The debtors testified that the move was temporary and that their intention was to return to their homestead.97 The court held that the debtors had not abandoned their homestead, relying on the purpose of Illinois's exemption to extend protection to the debtors.98 Consequently, abandonment in Illinois requires more than a debtor's temporary removal from the homestead property.99
Illinois provides a debtor with the full cash value of his homestead exemption, notwithstanding his occupancy in the homestead after filing for bankruptcy. In In re Szekely, the Seventh Circuit Court of Appeals considered whether debtors were responsible for rental payments when they continued to occupy their home after declaring bankruptcy.'00 The Szekelys continued to live in their home, on which there was both a first and a second mortgage, without making monthly mortgage payments.101 The trustee argued that the debtors should have been required to pay for using an asset of the bankruptcy estate upon the declaration of bankruptcy.102 The court looked at the case from the perspective of both the debtor, emphasizing the fresh start rationale of bankruptcy, as well as the creditor, particularly because bankruptcy is a remedy from unsecured creditors. While conceding that rent-free housing provides debtors with a windfall, the court found that debtors are allowed to live rent-free until they receive the cash value of the exemption.104
The strict limitation requiring debtors to be the head of household was abolished in 1982 when homestead exemptions were made available to every individual.105 As of 1982, the only threshold requirement for debtors to be entitled to the homestead exemption is that they occupy the land as residences.106 Another important change was Illinois's election in 1981 to opt-out of the federal exemptions, thereby requiring Illinois debtors to claim the state exemption.107
The homestead exemption in Illinois provides debtors with the necessary shelter or the financial means to acquire shelter during difficult economic circumstances.108 Although Illinois courts assert they have embraced the policy of providing debtors with necessary shelter, this assertion is highly suspect. In reality, the homestead exemption is "a monetary exemption so long as the value of the property exceeds the amount of the statutory exemption."109 A single debtor is entitled to an exemption of only seven thousand five hundred dollars, while two or more individuals may claim a homestead exemption of fifteen thousand dollars.110 The Illinois homestead exemption provides a debtor with a very small amount of equity to locate and obtain new shelter for the debtor's fresh start.
C. Florida and Texas: Homestead Exemptions With No Dollar Limitation
This Article highlights Florida and Texas because of the pervasive exploitation of the homestead exemption that has occurred in those states, where the exemptions have no dollar limitation. As noted in the Introduction to this Article, Enron Corp. executives currently residing in Texas will be able to protect their multi-million dollar homesteads from shareholder lawsuits by filing for bankruptcy. Similar exploitation may occur in Florida, where Boca Raton appears to be a prime destination for corporate chiefs whose conduct have subjected them to shareholder lawsuits.111 Dennis Kozlowski, who is charged with helping "loot" Tyco International, in which investors lost $80 billion, has a home in Boca Raton that is worth approximately $10.5 million.112 Scott Sullivan, a former executive at WorldCom, Inc., where investors lost $140 billion, is building a mansion in Boca Raton that is said to include an 18-seat theater and six luxury whirlpool baths.113
The unlimited exemptions in Florida and Texas are constitutionally mandated.114 The difference between statutory and constitutional state exemption laws cannot be overlooked because it is more difficult to reform constitutional provisions than it is to promulgate new statutory law.115 Thus it is unlikely to expect any reduction of the unlimited exemptions available to debtors who file for bankruptcy in Florida and Texas, unless a change is made at the federal level.
Florida's homestead exemption is one of the most debtor-friendly exemptions offered by any state.116 The starting point in any analysis is what property falls within the homestead exemption. "Conventional residential appurtenances" are within the protection of the exemption.117 Depending on the court's construction of the term "residence," personal property may also be within the protection of the homestead exemption. Courts have imposed an "actual and intended use" test to rationalize the exemption of various forms of property.118 As long as a debtor actually lives on real property being claimed as exempt, a non-exempt tree house or tent would be sufficient to establish the property claimed as exempt as the debtor's permanent residence.119
Florida citizens are only entitled to the exemptions the state law allows.120 Florida has also made it difficult for debtors to waive their rights to the homestead exemption. In the landmark case of Sherbill v. Miller Manufacturing Co., the debtors obtained a loan by executing a promissory note that contained a waiver specifying:"The makers and endorsers of this note hereby waive the benefit of their homestead exemption as to this debt."121 Despite the unambiguous waiver imbedded in the promissory note, the Supreme Court of Florida refused to enforce the waiver on public policy grounds; the homestead exemption could not be waived by the debtor as part of consideration for a loan that did not involve the exceptions set forth in the Florida constitution.122
The only exceptions restricting a debtor's right to the Florida homestead exemption are specifically enumerated in the state constitution, and those exemptions are to be strictly construed in favor of the debtor.123 The Butterworth court stated that the Florida Constitution does not create an exception for criminal activity, and "neither the legislature nor this [c]ourt has the power to create one."124 To prevent the legislature or the court from creating an exception to the exemption, the burden is on the creditor to establish by a preponderance of the evidence that debtors are not entitled to the exemption claimed.125 Florida's narrow reading of the exceptions, and its imposition of the burden on creditors to prove debtors are not entitled to the exemption, is a manifestation of Florida's commitment to protecting debtors through the homestead exemption.
Strict construction of Florida's exceptions to the homestead exemption will even extend to a debtor who has acquired a homestead in Florida "for the sole purpose of defeating the claims of out-of-state creditors."126 In Havoco of America v. Hill evidence was presented showing the debtor purchased a retirement home in Florida for approximately $650,000 in cash, which was part of a larger scheme by the debtor to defraud his creditors through bankruptcy. The Supreme Court of Florida, in its strict construction of the exceptions to the homestead exemption, found no exception for real property that is acquired in the state of Florida for the sole purpose of defeating the claims of out-of-state creditors.128 Although only three exceptions to Florida's homestead exemption have been delineated,129 the Hill court noted a possible fourth exception.130 Florida courts have invoked equitable principles to reach beyond the strict construction of the exceptions "where funds obtained through fraud or egregious conduct were used to invest in, purchase, or improve the homestead."131 Thus, where equity demands it, Florida courts will permit equitable liens132 "on homesteads beyond the literal language of [Florida's constitution], article X, Section 4."133
Florida "courts have always held that homestead laws should be construed liberally in the interest of the family and in favor of the person entitled to them."134 In 1962, the Florida exemption laws existed to preserve certain things necessary to earn a livelihood for unfortunate citizens and their families.135 These laws encouraged property ownership in Florida for the head of a household.136 Today, Florida's homestead exemption encourages property ownership in Florida. The exemption encourages wealthy debtors to move to the "Sunshine State" and invest their equity in expensive homes before filing for bankruptcy.
The first Texas constitutional provision relating to homesteads was passed in 1845 and provided an acreage limitation for rural homesteads and a value limitation for urban homesteads.137 In the mid-nineteenth century, the homestead exemption conferred on the debtor "a home as an asylum-a refuge which cannot be invaded nor its tranquility or serenity disturbed."138 The exemption, which protected citizens and their families, was designed "to cherish and support in the bosoms of individuals, those feelings of sublime independence which are so essential to the maintenance of free institutions."139
Today, the Texas homestead constitutional provision provides that "[t]he homestead of a family, or of a single adult person, shall be, and is hereby protected from forced sale, for the payment of all debts. . . ."140 The statutory provision similarly provides that a homestead is "exempt from seizure for the claims of creditors."141 Since its adoption, courts have liberally interpreted the Texas homestead exemption to afford debtors with exceptional protection from their creditors.142 The debtor's exemption from a forced sale of his homestead is to be upheld and enforced, notwithstanding the fact that a court may sometimes assist a dishonest debtor in wrongfully defeating the claims of his creditors.143
Despite Texas's history of using the homestead exemption to protect citizens and their families, Texas courts have refused to extend homestead protection to individual debtors under certain circumstances. Recently, the Texas Court of Appeals limited the protection offered to debtors.144 The court determined that the exemption could not be construed to protect a debtor's homestead when it has been forfeited for criminal conduct.145 The court said that the constitutional and statutory provisions specifically provided that homesteads may not be seized or foreclosed for the payment of the owner's debts or the claims of creditors.146 However, a debtor's criminal use of the property is not forfeiture for the payment of the owner's debts or the claims of creditors, thus precluding use of the homestead exemption to protect a criminal's homestead.147
In Texas, rural homesteads are limited to a two-hundred acre homestead exemption.148 In Cocke v. Conquest, the Supreme Court of Texas considered whether the homestead statute allowed separate tracts of land to be aggregated and exempted.149 The debtor claimed as exempt several parcels of rural land that comprised 188.4 acres.150 A distance of several miles in some instances separated the parcels, with the greatest distance being about twelve miles from certain portions of land the debtor had claimed as exempt.151 The court applied its policy of affording liberal construction of the statute to exempt the entire 188.4 acres as a rural homestead.152 The court's holding in Cocke was in accordance with its statements that were made seventy years earlier in 1857, in which the court declared a home residence must exist before a debtor could claim two hundred adjoining acres as a homestead.153
Texas, as Florida, has construed its unlimited homestead exemption liberally to provide debtors with exceptional protection from the claims of creditors. The exemption's objective of protecting a debtor's home in bankruptcy, upheld by Texas courts even when the debtor has acted dishonestly, will protect the egregious behavior of executives who may be forced to file for bankruptcy.
III. THE HISTORY OF FEDERAL BANKRUPTCY AND THE HOMESTEAD EXEMPTION
The original purpose of bankruptcy was to distribute a debtor's assets exclusively for the benefit of creditors.154 Bankruptcy has slowly evolved to its current state, which is also a process that is concerned with the debtor's welfare.155 Bankruptcy relief seeks to provide debtors with a fresh start from overwhelming debts while also ensuring each creditor receives an equitable share of the debtor's bankruptcy estate.156 Providing an individual with a fresh start by discharging debts and preventing creditors from reaching the debtor's exempt assets is generally accepted as being socially desirable.157 In an effort to provide debtors with a discharge, section 522(f) of the Bankruptcy Code (the "Code") provides that a discharge in bankruptcy "voids any judgment . . . to the extent that such judgment is a determination of the personal liability of the debtor."158 However, a bankruptcy discharge does not affect in rem liability, and liens on property remain enforceable after discharge unless they are avoidable under the Code.159
This Part of the Article begins with a historical analysis of the homestead exemption prior to the Code's enactment in 1978, and it considers the various effects the Code has had on the treatment of homestead exemptions in federal bankruptcy.
A. Historical Overview Prior to the Bankruptcy Code
Congress first recognized a homestead exemption in the late eighteenth century. The first homestead bill in 1791 was an exemption statute that protected the homestead and certain personal property from execution.160 The purpose of the first Homestead Act was to provide every householder or head of household with "a home, a place of residence, which he may improve and make comfortable, and where the family may be sheltered and live beyond the reach of those financial misfortunes which even the most prudent and sagacious cannot always avoid."161
The Bankruptcy Act of 1800 ("1800 Act") provided federal exemptions for debtors but failed to recognize state homestead exemptions.162 Debtors filing for bankruptcy were entitled to the exemptions provided by the 1800 Act, which strictly provided uniform exemptions.163 The federal exemptions included clothes for the debtor, the debtor's wife, and children, bedding for the debtor, and a stipend from the estate.164
The Bankruptcy Act of 1841 provided debtors with federal exemptions for clothing and furnishings up to three hundred dollars.165 As with the 1800 Act, the Bankruptcy Act of 1841 did not recognize state homestead exemptions and provided only uniform exemptions.166 Debtors were limited to a three hundred dollar exemption for "the necessary household and kitchen furniture, and such other articles and necessaries of such bankrupt" that were important to the family and condition of the debtor, not to exceed the specified amount.167
The Bankruptcy Act of 1867 (" 1867 Act") was the first to recognize state homestead exemptions along with federal exemptions. Under the 1867 Act, federal law set the minimum on exemptions, leaving the maximum open to the control of state legislatures.168 The 1867 Act specifically provided that property would be exempted from levy and sale upon execution or other process or order of any court by the laws of the State in which the bankrupt has his domicile at the time of the commencement of the proceedings in bankruptcy, to an amount not exceeding that allowed by such State exemption laws. . . .169
The 1867 Act was challenged because it lacked uniformity, but the issue was never resolved by the Supreme Court.170 The adoption of the 1867 Act was monumental, particularly because of the strong opposition by southern states in the mid-nineteenth century to any homestead law. Southern states had persistently opposed any policy that tended to augment the number of small farms because "slavery could not thrive, nor survive, in regions where the large planter had to