YOUR HOMESTEAD SHIELD – HOW DOES THE NEW BANKRUPTCY ACT AFFECT IT?
By Laura L. Rummans
By Laura Rummans, Esq. and Thomas Messana, Esq., and edited by Harry Rosen,Esq. of Ruden McClosky
Florida's Constitution arguably provides greater asset protection for residents of this state than is provided in most other states. The specific asset protection this article will focus on is protection for the primary residence when it is the "homestead property" of a Florida resident. For years, our laws and our courts have prevented creditors from "forcing a sale" of homestead property, unless a creditor claim falls under one of only 3 very narrow exceptions. However, recent legislation—The Bankruptcy Reform Act of 2005--may limit the "homestead protection" when a debtor files for bankruptcy. Under the new federal bankruptcy law, there will be a waiting period of 3 years and 4 months before a debtor will be a qualified Florida resident with the ability to claim Florida's homestead protection against creditors.
To fully understand how our laws protect our homestead property from creditors, it is helpful to review the policy reasoning behind the Constitution and the statutes. The scheme has two components: first, we have the exemption from forced sale (which is the asset protection feature of our homestead property) and second, we have restrictions on the right of a married individual (or a single individual with a minor child) to devise the homestead property—if the devise would deprive the surviving spouse or minor child of the right to inherit the family home. The logic behind these laws is to relieve the State of Florida from the burden of supporting citizens who might have to depend on the State if either the primary residence ("homestead") or rights in the homestead were lost.
Because our State courts do not consider the wealth of anyone requesting protection from forced sale by a creditor, most debtors protect the homestead property regardless of other circumstances—anyone can save his or her homestead property from a creditor unless the creditor proves a judgment is based on any of the following as related to the homestead property: (1) taxes or assessments, (2) obligations related to the purchase of or improvements to the property, or (3) a lien for labor performed on the property. So, if a creditor's claim falls into one of these narrow categories, the court may order the homestead sold to satisfy the claim. Otherwise, if the court finds the property is qualified homestead, it is protected.
How does property qualify as protected homestead? First we look at the deed or title, and then we examine the acreage and geographic location of the property. Finally, we review the domicile or residency of the owner of the property. Property cannot be in the name of a corporation for an individual to claim homestead protection. Property located outside of the city limits can be as large as 160 acres, but if property is inside of the city limits, only one-half of an acre will be protected homestead. The owner must have the required "intent" to make the property his or her primary residence.
Another concern is whether the individual asserting homestead protection has run afoul of the fraudulent conveyance laws in Florida. Our fraudulent conveyance laws allow a court to "unwind" a transaction if the court finds the individual transferred assets to avoid creditor claims. However, in a very recent case, a court in Florida extended protection to an Indiana couple's $10.2 million home they bought in Florida while a lawsuit was pending in Indiana that dealt with a "fraudulent transfer." The court found that the couple qualified as Florida residents and the property was considered protected homestead.
With the recent enactment of the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005," as of April 2005, "new" residents of Florida will not be able to take advantage of Florida's Constitutional shield to protect the homestead property—unless the individual has established residency prior to the previously mentioned look-back period.
Because a good asset protection plan should be in place in advance of a creditor obtaining a judgment, this new legislation should not affect long-term residents of Florida who wish to plan ahead to take advantage of protections available under Florida law.
Understanding the homestead asset protection rules is important, but a thorough asset protection plan will not rely on a solitary technique or exemption such as the homestead exemption. Depending on an individual's occupation, family dynamics, and assets, a Floridian has many options from which to choose when it comes to formulating the right asset protection plan. The plan should include a thorough review of potential liabilities and exposure "magnets" that may attract future creditors. And frequently the overall family goals will include protection for future generations because of the litigious nature of our society.