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

 

Involuntary bankruptcy keeps asset protection clients awake at night. Involuntary bankruptcy is the one thing that debtors cannot plan for nor control, and it is the most powerful creditor weapon against an otherwise effective asset protection plan. Why? Because debtor’s protections in a Florida bankruptcy court are much weaker than they are in state court. For example, a Florida debtor can protect unlimited money in a Florida homestead, and full protection is afforded immediately upon purchase and occupancy. Under the new bankruptcy law, however, the purchase of a Florida homestead within two years prior to bankruptcy is reversible as a fraudulent conversion and protection is capped at $137,000 for 40 months after purchase.

So how real is the threat of involuntary bankruptcy against wealthy Florida debtors? Is involuntary bankruptcy a "clear and present danger," or does this threat sound worse than it really is.

I have never been involved in an involuntary bankruptcy proceeding because no such petition has ever been filed against any of my asset protection clients. Other attorneys I’ve spoken with report similar experience. I decided to investigate this question by asking people in the bankruptcy system who have a superior perspective. This past week I discussed involuntary bankruptcy with a law clerk for a bankruptcy court judge in Florida’s middle district and a Chapter 7 bankruptcy trustee. Both people were cooperative and interested in the question. The law clerk has been serving as a bankruptcy law clerk for the same bankruptcy judge for almost six years. The trustee has been a full-time Chapter 7 trustee in our district for 18 years. Here is what they had to say about involuntary bankruptcy.

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Client from Montana with the usual collection of real estate problems. He guaranteed a multi-million dollar loan on a failing real estate project, and the very unhappy partners were threatening legal action. I invited the man and his money down to Florida. We discussed the typical asset protection plan including a big and expensive homestead, joint accounts, and places to legally park money where its difficult for creditors to touch it.

At the end of the conversation the client asked me what would happen in the event his creditors sought an involuntary bankruptcy. I told him that an involuntary bankruptcy would be bad news because the bankruptcy court could set aside his homestead protection (homestead rules are different in bankruptcy court), and the trustee could force him to turn over other assets that would be protected, at least difficult to get, in a state court collection.

The client was somewhat upset that my asset protection suggestions could not protect him against all possible creditor outcomes, and particularly, he demanded that I give him a way to avoid the consequences of involuntary bankruptcy. I told him to buy time by fighting all civil lawsuits, but I could not protect his planning from a bankruptcy trustee.

In the end, I was able to convince this client that involuntary bankruptcy was highly unlikely with his particular fact situation. I explained that involuntary bankruptcy is like the swine flu. Remember that earlier this year people on TV were warning us about the millions of people who could die from the worldwide swine flu epidemic, and political commentators complained about vaccine shortages; and here we are during flu season, and the TV horror stories are gone. I saw another TV story where there is a surplus of swine flu vaccines- they can’t give the stuff away.

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The more I speak with or read articles by other bankruptcy and asset protection attorneys the more I realize that our clients ask us all the same questions. One very common client concern is rebuilding credit after a bankruptcy. Credit is not a legal issue, and repairing credit scores is not within my professional expertise. I look to my clients experiences and writings by other experts to learn what I can about credit repair. I recently saw an interesting blog post on rebuilding your credit by Texas bankruptcy attorney Brian Fears.

One suggestion in Mr. Fears' article is making sure you promptly pay loans that survive bankruptcy such as student loans or reaffirmed secured debt. The debts Mr. Fears refers to must be paid.

However, too often, my own clients want to reaffirm unsecured credit cards in order to help rebuild their credit score. This is usually a bad idea. I don't think its worth obligating yourself to pay those credit cards that can be wiped out in your bankruptcy case. Good credit scores are helpful; cash is even more helpful. I try to convince clients to minimize post bankruptcy obligations even if it means taking longer to prove credit worthiness. Mr. Fears correctly advices that you should build post-bankruptcy credit scores based only on those debts which cannot legally be discharged in bankruptcy.

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Many asset protection clients are concerned about involuntary bankruptcy. Involuntary bankruptcy can deprive debtors of some asset protections which are effective in the creditor's collection efforts in state court proceedings. For instance, homestead protection is unlimited in state court but is restricted in amount and by time in a bankruptcy court. Debtors with otherwise effective asset protection plans often ask whether a single, aggressive creditor forcing them into bankruptcy court. The general rule is that one creditor cannot force an involuntary bankruptcy in order to collect the debt.

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Limited liability companies provide asset protection benefits, not because the membership interest in an LLC is exempt from levy and collection, but because the Florida statutes limit a creditor's collection remedies to that of a charging lien on LLC distributions, if any, to the debtor. This past week a client with a valuable membership interest in a multi-member LLC asked whether his LLC interest would be protected from a trustee in the event the debtor filed bankruptcy. The issue is whether collection restrictions imposed by Florida statutes, or other restrictions imposed on creditors by the LLC operating agreement, are binding upon a bankruptcy trustee. It seems that the answer depends on terms and conditions of the LLC operating agreement, and upon interpretation of an uncertain issue by the particular bankruptcy judge.

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Its very important to pay attention to all items on financial account applications, bank account agreements, bills of sale, vehicle titles, and all other transfer documents. For instance, one of my debtor bankruptcy clients married a man who is a commercial fisherman. The husband bought a commercial fishing vessel for all cash using money he earned from his profession and proceeds from the sale of an exempt piece of real property owned jointly with his spouse, my client. Commercial vessels have to be registered and titled by the U.S. government, and an application for new title is typically submitted by private title agencies that deal in these type of commercial boats. My client's husband hired such a private title company which sent a form to the boats prior owner for his signature in order to initiate title transfer. The form included several boxes to be checked, each indicating a different form of joint ownership. One of the boxes was for "tenants by entireties"; another for joint ownership with survivorship; and another for community property. The standard language on the form stated that if none of the boxes were checked it any joint ownership as tenants in common would be presumed. If the boat were owned tenants in common the bankruptcy estate could claim my client's undivided interest amounting to 50% of the fishing boat.

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The new bankruptcy law effective October 17, 2005, makes it much harder for people to move to Florida and proceed immediately to file bankruptcy. Under the new law a person has to be resident of Florida for two years to take advantage of Florida's liberal bankruptcy exemptions. There is no waiting period for protection against civil judgments outside of bankruptcy court. There is an important exception to the two year waiting period for Florida exemption protection in bankruptcy, and that exception is the protection afforded to assets owned jointly by husband and wife as tenants by entireties when just one spouse files bankruptcy

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Many people will be filing bankruptcy between now and October 17, and some of these debtors will go into bankruptcy knowing they have some non-exempt property which will be taken by the trustee for the benefit of their creditors. One such prospective bankruptcy filer told me last week that he had over $1,000 of liquid assets which he was prepared to surrender to his creditors in bankruptcy. The person asked me if it was permissible for him to sell his assets (in this case, stock) and donate the proceeds to the Katrina victims.

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Many people are scrambling to file bankruptcy before the new law goes into effect on October 17, 2005. The New York Times, Orlando Sentinel, and other Florida newspapers have recently published articles about the increase in new filings. Yet, many new Florida residents would fare better if they waited until after October 17 and filed under the new law. The reason is that bankruptcy debtors who moved to Florida within the past two years would be treated under the exemption laws of their previous state of residence or the standard federal exemptions. Florida has a particularly generous homestead exemption, but the exemptions provided by some other states and the federal exemptions are more liberal for other types of assets. For example, the federal exemptions protect in bankruptcy $15,000 of homestead, $2,400 of vehicle equity and $1,500 tools of trade whereas Florida statutes provide only a $1,000 vehicle exemption and no exemption for tools of trade. A new Florida resident who rents or who has little homestead equity, but who has a valuable car may do better in bankruptcy after October 17, 2005.

The new bankruptcy law makes filing bankruptcy much more complicated. Anyone now considering bankruptcy should make sure they discuss all options with a bankruptcy attorney and should not assume that filing under the old law will be in their best interst.

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I read an interesting article this week on involuntary bankruptcy in the American Bankruptcy Institute Journal. Daniel Morman, a Florida attorney, writes that the new bankruptcy law creditors will be able to use involuntary bankruptcy to strip homestead protection from people who move to Florida and buy expensive homes to protect themselves from creditors. One issue addressed in the article is whether a wealthy debtor forced into bankruptcy can save his homestead if his case is converted to Chapter 13 by virtue of "the means test." under the new law. In Chapter 13 the debtor would have to pay part of his debts over time. Mr. Morman states that the means test only applies to voluntary Chapter 7 petitions. Therefore, means testing will not stop creditors from using involuntary petitions to force a Chapter 7 liquidation of homestead properties.

I have written previously on this blog about involuntary petitions under the new bankruptcy law. There are many issues pertaining to involuntary bankruptcy which will have to clarified through judicial decisions. This article shows that bankruptcy attorneys are starting to pay attention to the importance of this issue.

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Many people who have recently moved to Florida and purchased homestead properties to protect their wealth against creditors in other states are concerned that after the effective date of the new bankruptcy law creditors may force them into involuntary bankruptcy. An involuntary bankruptcy would stip away homestead protection from anyone who has moved to Florida and purchased their homestead within the prior 40 months.

At a recent national conference of bankruptcy attorneys I asked the director of the lawyer's organization about increased risks of involuntary bankruptcy under the new bankruptcy law. Under his interpretation of the new law, the only people who could be debtors are those individuals who prior to attended a debt management course from an approved provider. Debtors who want to avoid bankruptcy would not take the approved course and they would thereby disqualify themselves from either voluntary or involuntary bankruptcy.

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Many people facing bankruptcy are tormented by collection agencies. There are legal ways to fight back using federal consumer protection statutes. For example, the Fair Debt Collection Practices Act provides that if you receive a collection notice and thereafter send a letter requesting verification of the debt, the creditor cannot take legal action until it provides written verification. If you ask for information about the debt, such as the payment history and amortization schedule where applicable, this information as to be provided before the creditor can proceed with a lawsuit. The creditor's failure to respond to your dispute and request for verification can be used in court to defend or delay collection suits. If you receive information from the creditor you may write back stating the information is insufficient or unclear and demand more information.

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Previous Blog posts have discussed fears that once the Bankruptcy Reform Act is in effect on October 17, 2005, more and more creditors will try to force people into involuntary bankruptcy in order to strip debtors of exemptions otherwise available under Florida law. For example, many debtors with expensive homes who enjoyed unlimited homestead protection in state court would forfeit homestead protection above $125,000 if they were forced into bankruptcy court by a creditor who filed in an involuntary petition. One creditor with an undisputed and liquidated claim for $12,000 can file a petition for involuntary bankruptcy. However, upon further review, fears of involuntary bankruptcy epidemic under the new bankruptcy law may be exaggerated, and in fact, the new law may make it even more difficult for creditors to impose bankruptcy upon individuals.

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Steve Leimberg's newsletter issued on May 3, 2005, provided another analysis of the effect of the new bankruptcy law on asset protection planning. The newsletter entry written by Jay Adkisson and Cris Reiser states that the new bankruptcy law changes the debtor-creditor paradigm. Prior to the Act, the authors note, a debtor could threaten a creditor with bankruptcy. After the Bankruptcy Reform Act, creditors will likely threaten to force a debtor into bankruptcy so, "the debtor's assets can be picked clean." The authors state that new asset protection plans should be designed to avoid bankruptcy and keep assets out of the bankruptcy estate in the even of a creditor's involuntary petition

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Changes to homestead protection in bankruptcy have been the focus of initial comments about the Bankruptcy Reform Act's effect on Florida debtors seeking bankruptcy protection. Specifically, homestead protection is limited to $125,000 for debtors who have lived in the house and previous homesteads less than 40 months. I think an even bigger impact of the new bankruptcy law will come from the "forum shopping" provisions. New Section 522(b)(3) specifies that the state law governing exemptions in bankruptcy is the state of domicile during 730 days (two years) before filing. If the debtor did not reside in a single state for that period, the governing exemption law is the place of domicile for the majority of 180 days preceding the two year period. Many people who file bankruptcy in Florida are new residents. These newcomers will be unable to claim in bankruptcy not just Florida's homestead protection but none of Florida's other exemptions including annuities or tenants by entireties protection unless these assets were exempt in their prior domicile. (IRA and pension exemptions are available to all debtors under the Bankruptcy Reform Act)

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An attorney called me this week to discuss a prospective bankruptcy client. The client was being sued in state court by numerous people who alleged they were fraudulently billed for chiropractic services. The client could no longer afford attorneys fees involved in these multiple suits. The attorney suggested that a chapter 7 bankruptcy would focus all the fraud allegations into a bankruptcy court setting. He suggested that the bankruptcy would effectively consolidate the civil suits, provide faster resolution, and possible give the client a more sympathetic forum. The question was whether bankruptcy is a preferred forum to defend civil fraud.

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I have commented previously that limited liability companies probably do would not have asset protection benefit in a bankruptcy proceeding. My reasoning was that the LLC protects assets by virtue of the limited creditor remedy of a charging lien provided in Florida statutes, but that in bankruptcy the trustee would claim that he is not limited by the state's creditor procedures and has title to all of the debtor's interest in a LLC. A bankruptcy court decision earlier this year in Arizona analyzed a trustee's rights to a debtors membership interest. The case was In re Ehmann decided January 13, 2005.

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Involuntary bankruptcy has become one of the biggest concerns of my clients since the Senate passed the new bankruptcy law. Involuntary bankruptcy will be a more important planning issue when the Bankruptcy Reform Act is effective, but in most cases, people are overly worried about this contingency. The new bankruptcy law creates a disparity between asset protection in state courts and in bankruptcy court with the latter becoming a much more creditor friendly environment because the new bankruptcy law strips away many protections otherwise available in state court. What most people do not understand is that it is difficult for any creditor to force a debtor into involuntary bankruptcy.

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The new bankruptcy law generally is not effective for six months after Bush signs it. Some provisions are effective immediately. One important change immediately effective is the $125,000 limit on protected homestead equity for those debtors who have owned their residence less than 40 months. Anyone with homestead equity greater than $125,000 and does not meet the 40 month waiting period and who is considering filing bankruptcy before the new bankruptcy law goes into effect should file bankruptcy immediately. The bill may be passed and signed in a couple weeks. File now and submit your completed schedules later.

The new bankruptcy law impacts homestead protection only in bankruptcy court and does not affect the homestead protection available in state court collection proceedings.

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The new bankruptcy law will create a wide disparity between asset protection in state court venues and protection in bankruptcy court. Exemptions will be fewer and harder to defend in bankruptcy. An example is Florida homestead which will continue to provide immediate protection against state court collections, but which will not be protected in bankruptcy court until 40 months after purchase or payment of mortgage principal. The increase of creditor rights in the bankruptcy setting will encourage creditors in some instances to consider filing petitions for involuntary bankruptcy. A Florida resident who was successfully protecting his wealth against creditor collections in a large homestead property could find his homestead protection stripped away if forced into bankruptcy. If a debtor has more than twelve unsecured creditors, any three creditors can join in a petition to have the debtor involuntarily declared bankruptcy. In the past, involuntary bankruptcy is uncommon because petitioning creditors can be held liable for damages and debtor's attorneys fees if their involuntary petition is denied for any reason. Involuntary bankruptcy will be a greater concern in asset protection planning after the new bankruptcy law goes into effect.

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The Senate version of the Bankruptcy Reform Act included a compromise amendment curbing asset protection trusts. My understanding is that compromise amendment included in a debtor's bankruptcy estate subject to distribution among creditors the debtor's beneficial interest in a self-settled asset protection trust created within the past 10 years if the debtor had the "actual intent" to evade obligations to certain government agencies and regulations, such as securities regulation. The amendment did not distinguish domestic asset protection trust from foreign trust. Although foreign trust may be maintained outside U.S. court jurisdiction, a debtor's property anywhere in the world is subject to bankruptcy court jurisdiction. Subject to further analysis, it appears that the Senate may not have impacted the effectiveness of properly created asset protection trust against most creditor claims in bankruptcy.

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The Wall Street Journal and other sources reported that the new bankruptcy law protects property held in domestic asset protection trusts. My understanding is that the new law ( and I haven't read it) does not mention domestic asset protection trust. An amended was proposed to specifically deny protection of these trust assets in bankruptcy. The amendment was defeated. By defeat of the amendment, the Senate expressed its intent not to include in the debtor's bankruptcy estate the beneficial interest in a properly formed domestic asset protection trust. I have not seen anything to suggests that these trust would be protected from the bankruptcy trustee's allegations of fraudulent conveyance, or that a trust reserving excessive control to the debtor (as most trust do) would not be included in bankruptcy estate property. The status of asset protection trust under the new bankruptcy law is more complex than it appears to be in the newspapers.

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The Senate's immanent has been widely reported in the press. The bill proposes an effective date six months after it is signed by the President. The bill is extensive and complex, and it will have some Florida asset protection consequences. It is important to remember that the new bankruptcy law is only applicable when a debtor chooses to file bankruptcy. None of the bankruptcy reform act impacts Florida's asset protection provisions of the Florida constitution or Florida statutes. Therefore, the Bankruptcy Reform Act should not affect asset protection planning against state court collection efforts. The primary impact upon Florida asset protection appears will be felt by those debtors who move to Florida with the intention of buying a homestead and subsequently filing bankruptcy. Under current bankruptcy law, a debtor from another state who establishes Florida residency must wait at least twelve months after purchasing the Florida homestead before filing bankruptcy. The new bankruptcy law extends the waiting period to 40 months.

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The N.Y Times ran an article on the proposed bankruptcy reform legislation now being debated in the U.S. Senate, and it said the law failed to close loopholes created by domestic asset protection trusts which are provided for by statutes of several states including Alaska, Delaware, and Utah. The Times quoted experts who stated that the new law would not stop people who had established domestic, as well as offshore, asset protection trusts from protecting their assets in bankruptcy.

These commentators are correct in theory, but their comments may not apply to most real life asset protection planning. First, most asset protection trusts are not set up correctly. Because most debtors fear relinquishing control over their assets to a third party trustee, debtors usually insist that either they or a closely related family member serves as trustee or that they at least retain the right to remove and replace their trustee. When a debtor files bankruptcy all of his interests and rights are turned over to the bankruptcy trustee including, if applicable, his control over the trust or his control over the trustee of the trust. Bankruptcy courts can force the debtor to exercise his retained control to appoint the bankruptcy trustee as trustee of the asset protection trust.

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I was visited by a Canadian bankruptcy trustee vacationing in Florida who wanted to learn more about our bankruptcy system. Canada has the equivalent of Chapter 7 and Chapter 13 bankruptcy statutes. The main difference between their system and our own is their exemptions. Exemptions differ by Province. In Ontario, for example, the Debtor gets no homestead exemption. Ontario provides more liberal personal property exemptions such as $10,000 household goods, a $5,000 vehicle exemption, $5,000 clothing, plus a $10,000 household furniture exemption. Another interesting difference is that throughout Canada bankruptcy is mostly non-judicial. Bankruptcy petitions are not prepared by attorneys, and attorneys normally do not represent debtors before the trustee. A debtor seeking to file bankruptcy submits to the jurisdiction of a licensed bankruptcy trustee who examines the debtor and collects non-exempt property. There are about 900 licensed trustees throughout the country, most of whom work for corporations. The trustees in private practice must develop their own practice and solicit debtors as customers. My visitor, a licensed trustee, said he charges about $1,400 per case.

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A new bankruptcy law reform has been introduced to overhaul the nation's bankruptcy code. This past week Senator Grassley (R-Iowa) introduced a bill which makes it more difficult for debtors to file Chapter 7 bankruptcy The bill aims to cut down on abusive and frivolous bankruptcy filing. Its principal change is a "means test" for people wanting to file Chapter 7 bankruptcy. People who earn less than the median income in their state are exempt from means testing. Especially important for people wanting to take advantage of Florida homestead protection, the bill proposes a limitation on the amount of money which can be exempted in bankruptcy under Florida homestead protection. The limitation applies only to people who have recently moved to Florida. The bills assault on homestead protection applies only to those debtors who file bankruptcy. The bill does not otherwise take away any of Florida's constitutional homestead protection.

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I have been asked more than once whether filing bankruptcy can adversely impact the debtor's security clearance with a private business or government agency. Most lawyers state that a bankruptcy actually improves security clearance. The typical employer wants to make sure that financial problems do not lead to more serious personal problems affecting employment such as drug use, alcohol, or high interest borrowing. Bankruptcies solve financial problems, relieve stress, and usually improve concentration and performance at work. I am not aware of any federal law that makes bankruptcy an impediment to government security clearance.

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