Florida Asset Protection : Asset Protection Law & Planning in Florida - Florida Homestead Exemption

The Florida Constitution includes three specific exceptions to homestead protection: consensual liens (mortgages); taxes and assessments (homeowners associations) and debts for improvement (mechanics liens). There is an important fourth exception to homestead protection established not in the Constitution but through a history of court decisions. The fourth exception is the "fraud exception." Courts have held that people cannot protect money used to purchase or improve a Florida homestead when the money was obtained by fraud or by breach of a fiduciary duty. Courts use equitable remedies, such as an equitable lien or constructive trust, to pursue the money taken from a fraud victim and put in a Florida homestead.

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 I have stated before in this blog that most large mortgage companies were not pursuing deficiency judgments after foreclosure. More recently, I have seen a few situations where second mortgage holders were suing the homeowners for personal judgments. The second mortgage companies were not suing for a deficiency judgment after the first mortgage foreclosed. Instead, these second mortgage holders have filed law suits against the homeowners to collect the underlying promissory note. This means that the mortgage company does not wait for a first mortgage foreclosure and does not initiate its own foreclosure on its second mortgage. After the homeowner misses  few second mortgage payments, the second mortgage company accelerates the entire balance of the mortgage note (which is a standard provision of most notes) and sues the homeowner to collect the entire note balance. The mortgage company retains its second mortgage; any proceeds paid to the second mortgage company from a sale of the property would reduce the balance of the judgment.

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The issue is whether you can exempt as homestead a commercial building with an second floor apartment used as your primary residence. A south Florida debtor owned a commercial building in Miami. He operated a adult entertainment club on the first floor. He claimed that he lived in an apartment on the second floor. During the day, when the club was closed, the debtor used the kitchen and the employee showers for personal use. He filed bankruptcy and sought to protect the entire property as homestead. The bankruptcy trustee objected to the exemption. The bankruptcy court overruled the debtor's exemption of the entire building as homestead and ordered that the trustee sell the property for the benefit of the bankruptcy estate, reserving to the debtor a percentage of the sale proceeds for his extent of personal use.

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People facing possible mortgage foreclosure often complain that their mortgage lender won't talk to them about loan modification or that they don't know how to reach any lender representative with authority to resolve their situation. Some courts in Florida are making it easier for homeowners to negotiate with their mortgage lender. However, help is not available until the case is within court jurisdiction in the form of a foreclosure lawsuit.

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An attorney wrote to me with an interesting asset protection question involving a typical estate planning tool. A homestead property was owned by husband and wife as tenants by entireties. The husband died. The couple had established a typical living trust which included a credit shelter trust that became irrevocable after the first death. The surviving spouse and children were the beneficiaries of the credit trust. The husband died. The wife disclaimed her survivorship interest in the jointly titled homestead so that the house automatically passed to and was titled in the husband's credit shelter trust. The question was whether the disclaimer jeopardized the homestead protection from creditors. I think the protection would remain intact for the wife's benefit during her lifetime.

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The risk of  personal liability from a mortgage foreclosure depends on the nature of the mortgages and the lenders. Second mortgage holders are more likely than first mortgage holders to pursue personal liability after a foreclosure. Among second mortgage holders, the risk of personal liability after foreclosure also depends on the nature of the second mortgage loan. Second mortgage loans by large, national lending institutions were most often made to help finance the purchase of the property or to finance an addition or improvement to the property. These second mortgages are typically conforming FNMA mortgages which were sold on the secondary mortgage and ended up as part of a marketable security sold to investors (the so-called toxic mortgages). These second mortgage holders are less likely to sue the borrower after either the first or second mortgage holder forecloses on the property.

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People facing foreclosures on investment property usually hope their lender will not pursue a deficiency judgment and will forgive balances due under their mortgage note. If the investor is fortunate enough to avoid a deficiency lawsuit he still faces income tax issues because of the general rule that forgiveness of a debt results in imputed taxable income. There is no imputed income if the real estate owner files bankruptcy or if he is insolvent at the time of the foreclosure. CPAs are dealing with foreclosure taxation issues for many of their clients during this tax season. I recently discussed with an experienced CPA the tax issues associated with foreclosure for those taxpayers not exempt from imputed income by reason of bankruptcy or insolvency.

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I receive several emails and calls daily from people with problem home mortgages. This week several people have asked me whether they qualify for help under the government's new mortgage assistance program. I read an article in the Wall Street Journal that described the two mortgage assistance programs implemented this past week. The Journal article included a chart that helped explain the program benefits and qualifications. I have reproduced the Wall Street Journal chart to assist Blog readers. WHO WOULD QUALIFY

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Tenants by the entireties protection from creditors is not the same in all states. Some states do not recognize the concept of tenancy by entireties ownership between married couples. Some states recognize entireties ownership of real property but not personal property. A client today claimed that a parcel of real property he owned in another state was protected from his individual creditors because the deed said it was owned as tenants by entireties. When I researched the laws of the state in question I found that the state laws did recognize entireties ownership of real property. However, the ownership had asset protection consequences different from Florida law.

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