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# Posted: 22 Oct 2006 06:42
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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.
I. INTRODUCTION
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.
1. Colorado
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
2. Ohio
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.
3. Minnesota
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
5. Illinois
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.
1. Florida
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.
2. Texas
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

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# Posted: 22 Oct 2006 06:43
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make way for the small farmer."171
The Bankruptcy Act of 1898 ("1898 Act") continued to recognize the application of state homestead exemptions in bankruptcy proceedings. The 1898 Act did not create federal exemptions and instead chose to incorporate state exemption laws, thereby providing states with broad discretion to determine the debtor's bankruptcy exemptions.172 The elimination of federal exemptions was a departure from previous bankruptcy exemption polices.173 By the time the 1898 Act was enacted, most states had constitutional or statutory exemption laws stating that certain property was exempt in bankruptcy.174 The Supreme Court supported the incorporation of more than fifty different exemption policies by suggesting the 1898 Act created '"uniform laws on the subject of bankruptcies throughout the United States,'" on the theory that uniformity was geographical and not personal.175
B. The Bankruptcy Act of 1978
Through the Bankruptcy Act of 1978 (" 1978 Act"), Congress sought to correct the inadequate relief that had been provided to individual debtors.176 The bill introduced to the Senate had proposed the allowance of state law to govern exemptions in federal bankruptcy proceedings as it had under the 1898 Act.17 In contrast, the House bill proposed that bankrupt debtors choose between state exemptions and specified federal exemptions.178 The provision the 1978 Act adopted predominantly reflects the provisions regarding exemptions in the House bill.179
The 1978 Act provided for a single set of federal exemptions that incorporated dollar limitations, yet also provided minimum level exemptions for debtors who lived in states with very restrictive exemptions.180 It also contained an opt-out provision181 allowing any state to return to the pre-1978 system that provided for state control over federal exemption laws, and thereby sacrificing any hope of uniformity.182
Two primary goals of the Code are (1) to relieve the honest debtor from the weight of oppressive indebtedness and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes; and (2) to make an equitable and efficient distribution of the debtor's property among his creditors.183 Congress wanted the 1978 Act to provide individual debtors with "adequate exemptions and other protections to ensure that bankruptcy will provide a fresh start."184 Under the Code, the conversion of nonexempt to exempt property for the purpose of placing the property out of the reach of creditors will not deprive the debtor of the homestead exemption to which he otherwise would be entitled.185 This procedure, which may be used by a debtor who seeks to maximize his homestead exemption, is not fraudulent and it permits the debtor to take full use of the exemptions to which he is entitled.186
C. The "Opt-out" Provision in Federal Bankruptcy
The opt-out provision in section 522(b)(l), for which virtually no legislative history exists, has been viewed as a "compromise provision."187 The opt-out provision provides states with the choice of either applying the federal exemptions in the Code or implementing their own exemptions.188 If the debtor's state has not opted out of the federal exemption scheme, section 522(b) allows the debtor to choose between the federal bankruptcy exemptions that are identified in section 522(d), other nonbankruptcy federal law, and exemptions under state or local law.189 Alternatively, the Code allows a state to require debtors to use the state's exemptions rather than the federal bankruptcy exemptions.190 By 1997, thirty-five states had opted out of the federal exemption scheme.191
A state's power to enact its own system of exemptions has some restrictions. First, the opt-out system only authorizes states to determine the nature and amount of property that can be claimed as exempt in bankruptcy.192 States can choose the "limits on the dollar amount of a homestead exemption," but "the state cannot define the exemption with reference to obligations not identified in 522(c)."193
The second restriction is that a state's exemption may not frustrate the purposes of the Code. The construction of a state exemption statute must comport with the underlying policies of both the Code and the state enactment.194 Thus, state exemptions have been viewed as a backdrop upon which "federal principles operate to render results consistent with bankruptcy policy (results often contrary to state law)."195 Federal courts consistently have found that the federal fresh start principles promulgated in section 522(c) override state law exemption limitations, even definitional limitations.196 The third restriction limits a state's power to encumber certain real property with judicial liens. The federal statute disfavors the impingement of certain types of liens upon the debtor's exemptions, regardless of whether the lien was federal or state-created.197 In Owen v. Owen, the Supreme Court declared judicial liens might be avoided under the bankruptcy statute as impairing a debtor's state law exemptions, even though the state defined exempt property specifically to exclude property encumbered by such liens.198
D. Avoiding Powers: section 522(f)(1)
"[T]wo requirements must be met before a debtor can avoid a lien under [section] 522(f): (1) the debtor must have had an ownership interest in the property before the lien attached; and (2) avoidance of the lien must entitle the debtor to a state or federal exemption."199 In Chiu v. Chiu, the debtors sold their home four years after the court granted the debtors a discharge in bankruptcy.200 Upon the sale of their home, the debtors were notified that a judicial lien on their property would have to be paid or the lien amount would be withheld from the sale proceeds.201 The debtors filed a motion to reopen their bankruptcy case, which the court granted. The debtors subsequently filed a motion to avoid the judicial lien, claiming that the lien impaired their homestead exemption. The debtors had owned the property before the court fixed the lien upon it, thereby entitling them to avoidance of the in personam lien.203
The outcome in many disputes will depend upon the interpretation of the "impairs an exemption" language in section 522(f).204 Courts have disagreed over two issues: (1) what constitutes impairment of an exemption; and (2) to what extent a lien may be avoided when an exemption is impaired.205 When a debtor has zero equity in his homestead because the property is fully encumbered by secured debts, some courts have held that there is no exemption having any quantifiable value to impair.206 Courts have also determined that a debtor's exemption is not impaired by a judicial lien when a debtor receives "his statutory amount in a forced sale prior to any distribution of proceeds to satisfy the lien."207
It is well founded that the debtor's avoiding powers are consistent with the purposes208 of federal bankruptcy law.2 If the Code allowed creditors to retain liens on real property, creditors would have an incentive to limit the rights of other creditors by racing to the courthouse, obtaining a judgment, and placing a lien on the debtor's fully encumbered real property.210 The second purpose of bankruptcy would also be undermined, as the "debtor would probably be precluded from ever gaining any equity in the property, therefore impairing his fresh start."2"
IV. THE NEED FOR UNIFORMITY
A. Problems With The Treatment of Homestead Exemptions
The most noteworthy problem with the treatment of state homestead exemptions in federal bankruptcy proceedings is the current scheme is devoid of uniformity. In the late nineteenth century no two state homestead exemptions were the same.212 Today, state homestead exemptions have become even more diverse, as states have afforded disparate treatment to issues such as waiver, abandonment, and noncontiguous property in determining the extent of the debtor's rights to the homestead exemption. Because the dollar limits of the exemptions vary from state to state, it is possible for a debtor in one state to have his multi-million-dollar residence exempt, while his neighbor in another state may have no chance of exempting his homestead in bankruptcy. Consequently, debtors that anticipate filing for bankruptcy in the near future may contemplate moving to the more liberal states, such as Florida or Texas, if they have been fully advised. This section identifies several noteworthy problems that have resulted from the inconsistent treatment of state homestead exemptions in federal bankruptcy proceedings.
1. Corporate Executives and the Millions of Dollars They Exempt
One significant problem under the current situation is that corporate executives are able to exempt millions of dollars by filing for bankruptcy in states such as Florida or Texas, where debtors may exempt an unlimited amount of equity. This problem is exacerbated because debtors retain their rights to the exemption even when they move into Florida or Texas just prior to filing for bankruptcy. For example, the shareholders of corporations such as WorldCom, Inc., Tyco International and Enron Corp. will have limited recourse against former executives of those companies because the executives can exempt multi-million dollar homesteads by filing for bankruptcy in Florida or Texas.213 This is one major reason why state homestead exemptions have been closely scrutinized in recent years. The exemption has become an exploitable loophole for "wealthy felons" who use the exemption to protect their assets and lavish lifestyles.214
2. Inconsistent Treatment: Prebankruptcy Conversion of Nonexempt Assets to Homestead
A second noteworthy problem with the current scheme is the inability of courts to be consistent in their treatment of prebankruptcy conversion cases. Under nearly identical fact patterns, some courts have found the prebankruptcy conversion of nonexempt assets to exempt assets to be permissible, but most find this conversion invalid as an attempt to "hinder, delay or defraud creditors."215
A troublesome case that illustrates the problems that may result from the homestead exemption's lack of uniform treatment for prebankruptcy conversion cases is Norwest Bank Nebraska v. Tveten.216 In Tveten, the debtor, who was personally liable for nineteen million dollars, followed the advice of counsel and before filing for bankruptcy converted nonexempt property into an exempt homestead.217 At the time of the debtor's bankruptcy petition, the Minnesota homestead exemption did not have a value limitation, and thus paralleled the current homestead exemptions in Florida and Texas.218 The Tveten court determined that the debtor could not enjoy full protection under the homestead exemption; the debtor's attempt to shield property worth seven hundred thousand dollars went beyond the purpose for which exemptions are permitted and the debtor's reliance on his attorney's prebankruptcy planning was not reasonable.219 From the court's perspective, the debtor was undermining the policy of the homestead exemption from one of a "fresh start" to "head start."220
The Tveten court recognized that a dollar restriction was needed in Minnesota to limit "the potential for unlimited abuse" that may occur when wealthy debtors seek prebankruptcy planning.221 The Tveten court ultimately may have imposed its own ethics and rejected the debtor's lawful right to make full use of his exemptions because of its dissatisfaction with Minnesota's unlimited exemption. One particular concern with the outcome in Tveten, which was voiced in the dissent, was that the court's holding left "the distinction between permissible and impermissible claims of exemption to each bankruptcy judge's own sense of proportion."222
Tveten has not deterred other debtors from attempting to take advantage of generous homestead exemptions. In In re Kravitz,223 the debtor made the following two declarations of homestead: (1) On May 5, 1995, the debtor signed a declaration of homestead for Florida property, which the debtor stated she owned and occupied as her "residence and homestead;"224 and (2) also on May 5, 1995, the debtor signed a declaration of homestead covering property in Massachusetts, in which the debtor stated she owned and occupied the property as her "residence and homestead."225 In determining the debtor's rights to the Florida homestead exemption, the court said that "the mere conversion of non-exempt property into exempt property on the eve of bankruptcy is not in itself such fraud as will deprive the bankrupt of his right to exemptions."226
In contrast to Tveten, other courts allowed the prebankruptcy conversion of nonexempt assets to exempt assets.227 In In re Chadwlck, the debtors had moved from Missouri22 to Kansas, a state that offers an unlimited homestead exemption, approximately six months prior to filing for bankruptcy.229 The debtors' residence was worth $176,000, and before filing for bankruptcy, the debtors paid $69,900 toward their mortgage in an attempt to shield this amount from creditors.230 Even though the debtors had filed for bankruptcy in Missouri, the debtors claimed the Kansas exemption, which the bankruptcy court permitted over the objection of the bankruptcy trustee.231 The court specifically noted that the debtors were attempting to use the Kansas exemptions, which "are among the more liberal in the collective 50 states, while Missouri exemptions are much more restrictive."232 The Missouri judge was forced to follow what he believed was the appropriate interpretation of the bankruptcy law, which permits debtors to convert nonexempt assets to exempt assets prior to bankruptcy. Thus, the procedure of "maximizing" the homestead exemption is permitted and debtors are entitled to pay down their mortgage with otherwise non-exempt funds.233 However, the Missouri judge used this opportunity to note "the more liberal exemptions are something of a reward to those persons willing to reside in a state [Kansas] whose main claims to fame are the largest hand dug well in the United States and the second largest ball of twine in the country."234
A third noteworthy problem has been the failure of certain states to amend their homestead exemptions to conform to the present-day needs of their citizens. Numerous states have failed to respond to evolving financial changes and they maintain statutes that exempt a diminutive amount of equity. Many of the current state homestead laws "represent 19th century perceptions of the family and, despite the significant changes which the family has undergone since then, homestead laws do not reflect those changes."
Virginia provides debtors a limited exemption of five thousand dollars,236 which is inadequate for any homeowner. Other states have also failed to protect their citizens adequately: twenty-two states provide exemptions of fifteen thousand dollars or less, which virtually ensures that debtors in those states will encounter numerous impediments in their attempt to locate shelter and start anew.237
4. An Overview of Different Polices Embraced by Various States
One general policy that coexists among the states is that the exemption is intended to assist debtors with their fresh start. However, a majority of the states have opted out of the federal exemptions and have embraced markedly different policies for determining the extent of a debtor's fresh start.238 The diverse policies have produced disparate treatment of the homestead exemption in federal bankruptcy. A comparison of the exemption in Minnesota, Illinois, and Ohio exemplifies how debtors receive a different fresh start depending on their citizenship because of the diverse state policies.239
In Minnesota a debtor's home is viewed as a "sanctuary."240 The Minnesota legislature intentionally seeks to protect debtors' homes in bankruptcy because when debtors retain their homes, they are more likely to spend money in the local economy, which is in the state's best interest.241
An Illinois debtor's homestead is not regarded as a sanctuary. Illinois aspires to provide debtors with the financial means to acquire necessary shelter.2 The Illinois exemption is intended to be a monetary exemption and it is insufficient to protect the debtor's home from being sold in bankruptcy.243 Ohio, which has adopted a similar approach to that taken in Illinois, provides its citizens with a limited exemption that offers less monetary protection than the federal exemption. Ohio's limited exemption virtually ensures that debtors will lose their homesteads in bankruptcy.244 Ohio's exemption continues to be a monetary exemption in lieu of the homestead and, as with Illinois, provides debtors with inadequate financial resources for their fresh start. Even though Illinois and Ohio view the homestead exemption as a monetary exemption, a debtor's fresh start in Ohio will cost the debtor ten thousand dollars more than a fresh start would have them in Illinois. Although the policies are similar in Ohio and Illinois, the protection afforded to debtors remains markedly different.
South Carolina and Colorado are two additional states that exhibit the disparate range of state polices. The policy of the homestead exemption in South Carolina is to prevent a debtor from becoming completely dependent on the state for financial support.245 By providing its citizens with a meager exemption of five thousand dollars,246 South Carolina could not credibly assert that its policy is to preserve the debtor's home. In contrast, Colorado considers the preservation of the debtor's home to be of "paramount importance."247 Thus, the purpose of Colorado's exemption mirrors the purpose of Minnesota's exemption. However, while both Colorado and Minnesota offer sizeable exemptions, their policies are different. Unlike Minnesota, Colorado does not view the debtor's homestead as a sanctuary. Colorado's policy is to preserve the debtor's homestead in bankruptcy, but, the homestead is not a safe haven and will be sold in bankruptcy when a debtor has equity in excess of forty-five thousand dollars.248
B. Recent Proposals to Amend The Federal Homestead Exemption
Notwithstanding the presence of Enron Corp. executives in Texas with multi-million dollar homesteads, a bipartisan group of lawmakers from Florida and Texas have resisted any proposed value limitation on the homestead exemption.249 Despite the resistance of lawmakers in Florida and Texas, the problems with our current system reveal that Congress needs to reach a compromise and establish uniformity. In recent years, commentators have advocated various proposals for Congress to do so.250 Some of these proposals, with their advantages and disadvantages, are considered below.
One proposal, recommended by the Honorable William Houston Brown, is a strictly uniform schedule of federal exemptions.251 This proposal would adopt a monetary range of exemptions and would take into consideration regional cost-of-living factors.252 This proposal would not eliminate all litigation over the homestead exemption.2 Questions of particular exemption claims would not be eliminated, but forum shopping and manipulation of state exemption laws would be.254 Thus, this approach would limit the incentive for former corporate executives who are under investigation to acquire multi-million dollar homesteads in Florida, as a number have done in the recent past.255 A strictly uniform federal exemption would also eliminate the multitude of policies that various states have embraced for determining the extent of a debtor's fresh start. The elimination of a state-determined fresh start is an appealing feature of this proposal because the various "exemption policies are not conducive" to uniformity in federal bankruptcy proceedings.256
Functionally, this proposal would establish federal exemptions with no reference to state law.2 This proposal would conform to the earliest bankruptcy acts, which "avoided the uniformity problem by declaring, entirely without reference to state law, what the federal bankruptcy exemptions should be."258 A system of federal exemptions with no reference to state law would be consistent with "the objectives the Framers had in mind when they gave Congress the power to make 'uniform Laws ... on the subject of Bankruptcies.'"259 Thus, a controlling federal exemption would reflect the historical purpose of the uniformity provision to construe federal exemptions "as embodying standards rather than as embodying arbitrary provisions which can be overridden by the states."260 The elimination of state law from the issue of bankruptcy exemptions is constitutional and would leave state law to control nonbankruptcy issues.261 Thus, this proposal would finally eliminate the "hydra-headed beast of fifty different rules" and state policies, which have resulted in a bankruptcy system that is devoid of uniformity.262
An alternative proposal would establish a cap, or ceiling, on state homestead exemptions. This approach, which the Honorable A. Jay Cristol advocates, would establish a "finite, modest dollar amount" that debtors would be able to exempt in bankruptcy.263 This proposal reflects the purpose of bankruptcy, which is to provide the honest debtor with a fresh start.264 States would be allowed to opt-out of the federal exemption scheme, but the state's exemption would be limited by a specific dollar amount.265 This rule would eliminate the frustration of debtors in states with limited exemptions, such as Ohio, Illinois, and South Carolina, who realize that a fresh start in their states imposes a significantly greater cost than a fresh start in a nearby state.266 Capping the exemption would ultimately resolve the dispute of what is a "fair fresh start for an honest debtor."267 One drawback of this proposal is that states would still be able to opt-out of the federal scheme. Thus, a cap on the maximum amount of state homestead exemptions would fail to ensure there is complete uniformity in homestead exemptions.268
C. Proposals Considered By Congress
In 2000, Congress passed a bill limiting "the differences in state homestead exemptions by capping the permissible monetary amount of the . . . exemption" at one hundred thousand dollars.269 The bill had been in the works since 1997, but then President Clinton pocket vetoed the proposal because he viewed the measure as flawed,270 taking specific issue with the bill's failure to limit some of the most liberal state homestead exemptions.271
A bankruptcy bill died during the lame-duck session of the last Congress that would have required an individual to reside in a state for 730 days to receive the benefits of that state's homestead exemption.272 The proposed revision to the legislation would have created a $125,000 ceiling on an individual debtor's homestead exemption.273 However, the $125,000 ceiling would have applied to individual debtors only under the following circumstances: (1) the individual debtor had moved to the state within forty months of filing for bankruptcy; (2) the individual debtor owed debts resulting from securities fraud or fraud committed while in a fiduciary capacity, or from certain acts causing serious physical harm, such as wrongful death; and (3) the individual debtor had been convicted of a felony and a bankruptcy judge finds the debtor to be avoiding financial obligations relating to the felony.274
The provision that applied to debtors that had been convicted of securities fraud or fraud committed while in a fiduciary capacity would have had a profound impact on former executives that currently reside in Florida or Texas. Senator Herb Kohl, the leading Senate opponent of the unlimited homestead exemption, said the compromise reached by Congress in 2002 would have prevented Enron Corp. and other corporate executives "from cheating the system-the worst abusers are the carpetbaggers and bad actors who use the homestead exemption to game the system and shield millions from their creditors."275 Although the bankruptcy bill was not passed during the last Congress, an sec report issued in January 2003 asked Congress to pass "legislation to exclude securities cases from state law property exemptions," in particular, homestead exemptions.276
In a letter to Senator Patrick Leahy and Congressman F. James Sensenbrenner, "a diverse group of professors who teach bankruptcy and commercial law" expressed their concerns over the compromise that the conference committee reached in April 2002.277 These concerns included the enhanced difficulty for people to use any homestead exemption and the loopholes created by a portable homestead exemption.278 Specifically, the professors were concerned with the carry-over provision, which would enable residents from Florida or Texas to bring their unlimited exemption to states such as Illinois, which limit the value of debtors' homestead exemptions.279 The compromise also failed to limit the dollar amount of the exemption for individuals who fraudulently acquired money from the elderly, who took advantage of first-time homebuyers, or who deceived people trying to arrange college funds for their children.280 Finally, some of the professors feared that the $ 125,000 value limitation was too high,281 although they were unable to agree on an alternative amount.282
D. The Solution for Coherence
The solution that needs to be attained is a hard, uniform cap on state homestead exemptions. A hard cap on the exemption would reduce the disparity among state homestead exemptions and would successfully reduce the disparate range of state policies. A uniform cap, instead of creating a strict federal exemption applicable in every state, would not eliminate every contrasting state policy because a hard cap would preserve the right of states to opt-out of the federal exemption. States could employ their own policies so long as the exemption remained below the hard cap. Thus, while this solution would provide coherence in federal bankruptcy proceedings, it would not produce absolute uniformity.
Congress should adopt a hard cap of sixty thousand dollars to limit the overwhelming protection many debtors receive from some state homestead exemptions. This limit on the homestead exemption would not impede the rights of debtors because: (i) a hard cap of sixty thousand dollars would not affect many states; and (ii) sixty thousand dollars would provide debtors with more than adequate financial resources for their fresh starts. Furthermore, a hard cap of sixty thousand dollars is consistent with federal bankruptcy's general purpose of providing debtors with a fresh start. The hard cap would ensure that debtors no longer receive a head start by exempting million dollar homesteads in states such as Florida and Texas. A hard cap on the exemption would eliminate the windfall that is available to debtors in states with unlimited exemptions. Those states with policies designed for debtors to retain their homestead in bankruptcy would be compelled to embrace policies that are more consistent with the policy of providing debtors with a head start. In addition to limiting the protection afforded to citizens in Florida, Texas, Kansas, Iowa, and South Dakota, the cap would also limit the security available to citizens in Minnesota. Minnesota, which views the debtor's homestead as a sanctuary, would need to embrace a more conservative policy. By providing an exemption of sixty thousand dollars, these seven states could embrace Colorado's general policy that a debtor's homestead is of paramount importance. Thus, while a sixty thousand dollar cap would not absolve all disparity among state homestead exemptions, the spectrum of unrelated state polices would be diminished. As a result, the hard cap would give the homestead exemption some notion of uniformity. Marginal coherency, established by the hard cap, would ameliorate many problems in federal bankruptcy proceedings.
Ryan P. Rivera*
* J.D., Emory University School of Law, Atlanta, Georgia (2004); B.B.A., University of Iowa, Iowa City, Iowa (2001). I would like to give special thanks to my mother, Eleanor Antle Rivera, and my brother, Grant, for their unwavering love and support throughout my academic career. I would also like to recognize and thank Professor Frank S. Alexander for his guidance and advice in the writing of this Article.

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