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

A client asks: " doesn’t the creditor have to find out if I’m head of household before they garnish my wages." In other words, is your creditor obligated to check out your exemptions before taking action to collect a judgment? The general answer is: "no."

Florida law does not require a judgment creditor to investigate and negate possible exemptions prior to making attempts to execute upon their judgment. In this clients case the creditor legally can serve a wage garnishment on the employer. The debtor has the burden of asserting head of household exemption and dissolving the garnishment in court. The same rule applies to garnishment of an exempt entireties account. The creditors writ of garnishment will freeze the account until the debtor takes action to dissolve the garnishment. In most cases, the debtor will need to pay an attorney if he wants the garnishment of an exempt asset removed quickly.

Florida law provides valuable exemptions; the law does not guarantee that the exemptions are self-executing or free.

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A reader asked me about using a long term care insurance product as an asset protection tool. The reader says that an insurance agent told him about long term care insurance that can be paid up front in a single premium payment. The insured makes a lump sum payment to the insurance company in return for long term care policy for the rest of his life. The age and health of the insured determines the amount of the lump sum payment.

Built up cash value in life insurance policies is exempt from creditors and bankruptcy trustees under Florida statutes. The statutes do not exempt cash value of any other insurance. Other insurance, such as health insurance and property insurance, if paid up to date is not an asset subject to creditors because no money is owed to the debtor prior to the event covered by the insurance (medical expense or property loss). Money spent to buy expensive insurance generally is not a fraudulent conversion because most people buy insurance for reasons other than asset protection. .

I have never seen a fraudulent transfer case dealing with the debtor’s single premium long term care insurance. In my opinion, the answer depends on whether the debtor/insured retains any right to cancel the policy and receive a refund. If the single premium is irrevocable with no right to cancel if the debtor changes his mind then I think the debtor has protected the money from his creditors. On the other hand, if the debtor is entitled to a refund or to borrow unused future premiums then I thank a creditor could levy upon the money. The creditor cannot attach any more than the creditor can get for himself.

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I’ll address two similar client questions in a single blog post. One caller told me he had lost his job and that credit cards had already sued him. He cannot afford an attorney to defend the lawsuits or to negotiate on his behalf with the credit card companies. He is concerned that after they get a judgment the credit card companies will garnish his unemployment check. This person is head of household.

A second person sent me an email recently because he was concerned a judgment creditor could garnish alimony payments from her ex-husband. She said she needs all of the alimony to survive financially including support of her child.

The Florida statutes exempt from garnishment earned income including wages, salary, and commissions. It appears that the legislature is protecting from creditors money the debtor earns from his or her job. Unemployment compensation is paid for "not working" and is not earnings from employment. Alimony is taxable income, but it too is not earnings from employment. Does Florida’s wage garnishment protection exempt unemployment compensation and alimony. The answer is: "no, but its ok."

Unemployment compensation and alimony are not protected from creditors by virtue of Florida’s statutory protection against garnishment of earnings of the head of household debtors. However, unemployment compensation and alimony is exempt from garnishment. There is a separate Florida statute which exempts all unemployment compensation from creditor claims, and Florida appellate courts have protected alimony from garnishment as a matter of good public policy.

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Creditors cannot garnish wages of Florida resident who is head of household. Wages earned by the spouse who is not head of household is subject to garnishment. Sometimes clients ask me what compensation is included in the definition of "wages" which are either exempt or are subject to garnishment.

This week I met with a married joint debtors. The husband debtor had a job and his income supported the family. The wife debtor has lost her job and was receiving unemployment compensation from the government. The couple understood that the husband’s wages were exempt, but he wanted to know if the joint creditor could garnish unemployment benefits paid the wife debtor. If unemployment income is a form of wages then it logically could be garnished.

Unemployment benefits may be income for tax purposes but the payments are not wages subject to garnishment. Florida Statute 443.051 states that any unemployment compensation payable under state law may not be assigned and are exempt from all creditor claims.

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One of my asset protection clients recently moved to Florida from Arizona with his family. The client is being sued in Arizona, but his wife is not a defendant. They jointly own a house in Arizona which they have rented. The house has no equity currently. However, the house is fully furnished with furniture purchased during their marriage. The client understands the plaintiff and potential creditor will have a lien on the Arizona house if the plaintiff wins the lawsuit. The client asked me if the furniture in the house is exempt as tenants by entireties property because he and his wife are now Florida residents.

The general rule is that a judgment creditor levies upon real property in the state where it is located. The rule regarding personal property is more complicated. A judgment creditor is not limited to any one state in pursuit of a debtor’s personal property. A creditor can levy upon property wherever he can find it. If this creditor and his wife buy furniture for their Florida home the furniture would be exempt as tenants by entireties property. However, Florida debtors cannot export exemptions to other states. Arizona is a community property state that does not recognize tenancy by entireties ownership. The debtor cannot assert entireties protection for his Arizona furniture, and a judgment creditor could levy upon the debtor’s interest in all personal property the creditor finds in the previous home or anywhere else in Arizona.

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A few days ago I wrote a blog post comparing the asset protection of Totten trusts and UTMA("uniform gift to minors") financial accounts. I explained that the Totten trusts were not protected from creditors because the accounts could be revoked or invaded by the parent, whereas the UTMA accounts were protected because deposits made to these accounts are legally irrevocable. The asset protection of the UTMA account presumes that the parent follows the law.

A caller from Miami had read the UTMA blog posts and wanted to confirm the protected status of his child’s account. The story is told that a few years ago when the caller was "rich" he made a six figure deposit into his only child’s UTMA bank account. His intent was to set aside some money for his child’s college education. Then, the recession. The caller lost over a year ago. He spent his savings supporting his family. In his last effort to keep his house he began paying his mortgage from his child’s UTMA account. He called me because he just wants to make sure that his increasingly angry creditors cannot get the UTMA account so he’ll be able to keep the house until he finds work.

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I received an interesting email question about wage garnishment issued outside of Florida against a Florida resident. The questioner resides in Florida and works for a Georgia company at its Florida office. The questioner has a civil judgment entered against him in Florida. The questioner’s pay check is issued by the employer’s payroll office located in Georgia. He is married and is head of household under Florida law. He asks whether his wages would be garnished if the creditor domesticates the judgment in Georgia and serves a writ of garnishment against his employer at the Georgia headquarters.

This debtor is entitled to Florida’s exemption against wage garnishment as long as he permanently resides in Florida. If the employer has a Florida office, which question implies it does, then the creditor will cause the Florida court which issued the judgment to serve the employer at its Florida office. A Florida court should dissolve the garnishment. If the employer did not have a Florida office then the creditor might transfer the judgment to Georgia and serve the writ in Georgia. The debtor could assert his Florida exemption in a Georgia court.

The debtor’s wage garnishment protection is determined by his residence and not where the creditor serves the writ of garnishment on the employer.

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A husband and his wife are jointly liable on a real estate bank loan and could not afford to continue payments. After they stopped making monthly payments the bank  sued both spouses to collect the full loan balance. Both spouses worked and were concerned that the bank would garnish their wages after getting a judgment.

In Florida, a judgment creditor cannot garnish wages of a debtor who is head of household. In a traditional family setting only one spouse can be head of household where there are minor children. The general rule is that the higher earning spouse provides the majority of support for the children and is head of household, and the lesser earning spouse is vulnerable to wage garnishment. In this particular case, both spouses thought they were head of household in their family.

The facts in this case were unusual. Theirs was a second marriage. Each spouse had children from a prior marriage. Because they worked at jobs in different Florida  cities each spouse lived in their own house  with one or more of their own children. Each spouse supported their respective children in their homes. Each spouse owned their own home individually. Each spouse contended that they should be head of household and exempt from wage garnishment. Can there be two heads of household, exempt from wage garnishment, in the same family?

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Here's a couple short questions and answers I dealt with during the past few days. First questioner states that he owns an investment property through his self-directed IRA. Payments are late and the bank started foreclosure. He knows that IRA assets are exempt from creditors. He asks if his IRA property ownership provides any foreclosure protection. I think not. The IRA has entered into a contractual agreement to pay back a loan and has voluntarily granted the lender a mortgage as security.

There is no statutory exemption against mortgages voluntarily entered into by the IRA to secure a money loan. If the debtor had another judgment from a third party, the IRA and the assets it owns would be exempt from the third party's judgment.

Another reader from New Jersey states that he owns a Florida condo subject to a first mortgage with a New Jersey lender. Payments are in arrears. The New Jersey bank has sued the owner in New Jersey based on the underlying mortgage note. The lender has not instituted a foreclosure action in Florida. He asked whether the lender can sue on the note rather than foreclosing and thereafter seeking a deficiency. I think the lender is properly electing the sue on the note in New Jersey.

Any mortgage lender may sue to collect an unpaid mortgage note in lieu of foreclosure.

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An attorney emailed me with a question about a prospective bankruptcy client who is in the real estate sales business. The real estate salesman has a few contracts in the pipeline- sales contracts are signed subject to financing contingency and other conditions. If the sales close the realtor will earn a commissions. The question is whether the salesman has to value and report these future earnings on a Chapter 7 bankruptcy petition either as an asset or as income. The attorney wonders whether the debtor should discount the present value of the future commissions based on their probability and timing.

There have been many blog posts dealing with tenancy by entireties bank accounts. I have often explained that accounts opened by married couples as joint tenants with rights of survivorship are presumed to be owned tenants by entireties under Florida law. I advise clients to open accounts specifically titled as tenants by entireties so they don't have to rely on the legal presumption that creditors can overcome and rebut under some circumstances. There is nothing to rebut or overcome if the account is titled as an entireties accounts.

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The Florida statutes exempt retirement pensions from creditor claims. Courts have protected pension distributions after they were deposited in financial accounts. This week a Florida resident with an English accent called me with asset protection questions. On of his assets is a pension from an English company which he earned while working for many years in England. He assumed that his English pension is safe from creditors. I told him I disagreed, and that I think his creditors could garnish the pension ( they may have to go to England to do so), or his creditors could levy upon pension payments after they were deposited in a U.S. checking account. Why is an English pension not a protected pension?

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One of my asset protection consultations this week was with a military attorney. Hisjob is traveling around to military sites, both domestic and in combat areas, to advise soldiers about their V.A. benefits. Interesting job. In any event, my client had some civil creditor problems. Hispersonal assets included a "Thrift Savings Plan" with the government and a stream of disability payments from a V.A. disability insurance policy. Neither of these assets are not clearly exempted in the Florida statutes.

The client's V.A. disability policy could be exempt under Florida Statute 222.18 which protects, "disability income benefits under any policy or contract of life, health, accident, or other insurance.... I think a creditor attorney could argue that V.A. benefits are not protected by this statute because they are not due pursuant to a disability "policy or contract" as they are automatic benefits given to all military employees by virtue of their service. I think most courts would reject that distinction. Nevertheless, the providing to V.A. disability to our soldiers provides independent protection. The federal V.A. laws provide that benefits administered by the V.A. are exempt from claims of creditors before or after receipt.

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During this past week I met with a new client who had recently been subject to a money judgment from a credit card company. The client, retired, had a reverse mortgage on his homestead which money he used to pay his basic living expense. As most know, a reverse mortgage involves a bank providing a guaranteed monthly payment for the owner's life in exchange for the house title upon the owner's death. The retired client was concerned that his creditor could garnish his monthly reverse mortgage payments. I don't think a court would permit garnishment of reverse mortgage payments if the mortgaged property were currently the debtor's homestead. Protecting money received and deposited in the debtor's bank account is more difficult.

Lets start with the general rule that although your homestead is creditor exempt once you convert the homestead equity to cash by mortgage or sale the money is no longer protected by the constitutional homestead protection- the one exception is the continued exemption of sale proceeds intended to purchase a replacement homestead. Application of this general principal would lead to the conclusion that proceeds payable or paid from a reverse mortgage are not protected. I think a court would not permit the garnishment for two reasons. In my opinion there is a strong public policy protecting the money people rely upon for retirement, and in most cases, reverse mortgages are used to fund retirement of seniors who have managed to pay off their mortgage. A brief legal research session revealed no Florida cases on this issue.

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From time to time people call me and state that a title search discovered a judgment lien on their homestead. They ask how a judgment can encumber their homestead property if homestead is exempt from creditors.

A title search does not answer the question of whether there are enforceable judgment liens on your homestead. The search will tell only what filing appear on the public record. Any civil judgment against you will appear when you do a title search of any property in your name. Whether a recorded judgment acts as a lien on your homestead is a separate legal issue that takes into account the Constitutional homestead exemption.

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Everyone knows that it is very hard to negotiate with a bank to modify a bank loan. Banks are difficult creditors to deal with. Yet, after a bank which has already sued and has a judgment against you is a relatively easy creditor. Banks tend to accept very low settlements of judgment debts whether the debt is related to a mortgage, a credit card, or a commercial loan. I never understood why banks tend to settle for "pennies on the dollar", although I assumed they had good reasons to resolve their claims quickly and cheaply. This past week I discussed bank settlement policies with a new client from Chicago who had worked there for the FDIC for many years. He was quite familiar with the internal workings and thinking of commercial banks.

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Money received from the sale of a homestead is exempt from creditors so long as you are holding the money to buy a replacement homestead and as long as the sales proceeds are segregated. If you decide to downsize your homestead and use only part of the money to buy a house, can you use the rest of the sales proceeds to buy a protected annuity? The general rule is that using exempt assets (homestead proceeds) to buy another type of exempt asset (annuity) is not a fraudulent conversion. Because the homestead sales proceeds are exempt when you intend originally to reinvest all into a new house it may seem that you can safely use any portion of a homestead account to buy any other exempt asset. Or, do homestead proceeds lose their protection when invested in anything other than a new homestead.

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A client asked me two homestead questions which questions I have previously heard from other clients or email inquiries. This client owned a homestead with significant equity within a municipality. Homestead properties within a city up to ½ acre in lot size are protected under the Florida Constitution. The client said he intended to buy a ½ acre lot adjoining this existing homestead as an investment, and he wanted to know if the lot would be protected from creditors. My opinion is that the lot purchase would jeopardize the homestead protection of his existing house. Homestead includes the property upon which your residence is located as well as all contiguous land. If the client purchased the adjoining lot and took title in his own name the adjoining lot would be incorporated into his homestead and the size of his entire homestead would increase from ½ acre to a full acre. Thereafter, only 50% of the total homestead would be protected within the city limits. The client could not apportion protection to the original lot on which the house is situated. The purchase of the contiguous lot in his own name would forfeit protection of 50% of his house value. A better strategy would be to form a limited liability company and have the LLC purchase the adjoining lot. Because the client does not personally own the new lot it would not add to the size of his homestead. Land owned by entities, as opposed to natural persons, cannot be homestead property. The LLC would give some, although imperfect, asset protection.

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Limited liability companies are generally better asset protection entities than corporation. A judgment debtor can levy upon the debtor's stock in a corporation and in the case of a small corporation possibly stop the corporation business and liquidate corporate assets. In the case of a debtor's limited liability company interest the judgment creditor's remedy is limited to a lien on distributions, if any, and the creditor cannot stop the LLC operations or force the sale of the LLC's assets. In the past, the corporation, and particularly Sub-S corporations, were the most common business entity for closely held small business. When owners of small corporations become concerned about asset protection they often want to convert their S corporations to LLCs, possibly LLCs taxed as S corporations for tax purposes.

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I dealt with an interesting question today about alimony and support questions. Sometimes people ask me if there are asset protection tools to guard against awards for payment of alimony or support (generally, the answer is "no") or what types of assets are vulnerable to enforce family court judgments. Today's issue was different. A divorced woman was facing a large civil judgment. The divorce court awarded the woman alimony, and her ex-husband sent her monthly alimony checks. The woman depended upon the alimony to pay her basic costs of living. She wanted to know if a judgment creditor could garnish the alimony payments from the ex-husband.

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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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Bank accounts owned jointly by a husband and wife are exempt from the individual creditors of either spouse as tenants by entireties property. Today, one of may clients described a joint bank account that was titled in the name of their respective living trusts. The account was owned by the Husband, as trustee of husband's living trust and Wife, as trustee of wife's living trust. We discussed the issue of whether a bank account owned by spouse's living trusts, rather than the spouses' individual names, is a protected entireties accounts.

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Most families want simple estate plans. Sometimes the simple plan, a will leaving our money to our children equally and immediately upon our deaths, is a really bad estate plan in the event any of our children have legal problems after our deaths. A better plan, for asset protection, is an estate plan that holds the childrens' inheritance in a continuing trust where it remains protected from our childrens' creditors as long as they keep the trust in effect. A caller this past week told me his parents, recently deceased, had made a living trust which provided for the immediate distribution of his inheritance. The parents' trust was in the process of administration. The caller was concerned because he had a large potential judgment creditor. I explained that a judgment creditor could levy upon his share of the inheritance. The creditor could garnish the money payable to the debtor from the living trust.

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Florida Statute 222.11 protect from garnishment wages and other compensation earned by a head of household, and it further exempts wages deposited in the debtor's bank accounts. . A client asked me this week if workers' compensation payments were exempt under the wage exemption statute. The client thought that if the law protects wages paid to an employee the law should also exempt money paid on account of injuries incurred during employment. I found that the wage exemption statute, 222.11, does not exempt workers' compensation, but that other Florida Statutes provide an exemption from creditor garnishment.

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Business arrangements among family members are usually informal without full legal documentation. Casual business dealings among family members work fine between the family members themselves as long as the family relationships are on good terms. But, when the same family members have creditor problems an informal family business dealing can lead to problems when proper documentation is lacking. Consider a caller who described a property he purchased with his parents. The deed showed the parents and a child each had an undivided 50% interest in the property as tenants in common. This means that each 50% interest is separate from the other 50% interest. The parents paid cash for their interest. The child borrowed 50% of the purchase price to pay his part of the purchase. The child made all the mortgage payments by himself. The bank demanded a mortgage on the entire property, not just the child's half, to secure the loan. The property has not changed value since the purchase.

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A homeowner may incur income tax liability for debt forgiveness when a bank forgives a portion of a mortgage either by taking a deed in lieu of foreclosure, through a short sale for part of the mortgage balance, or by relinquishing rights to a deficiency judgment after foreclosure sale. Owner occupants are exempt from imputed income. A caller this past week asked me about income tax treatment from a mortgage modification. In this case, the mortgage lender had proposed forgiveness of past-due interest and late fees. The accounting question is whether the modification has the same income tax effect as forgiveness.

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A reader posed an interesting question about tenants by entireties protection. The reader, a man, is a U.S. citizen married to a non-citizen wife. The reader stated that he currently resided in a foreign country with his new wife. Three years ago he lived in Florida. He intends to return to Florida with his wife and establish their primary residence in Florida. He has substantial debts and some of which have already resulted in Florida judgments. He asked whether he and his non-citizen, non-resident wife can maintain money and securities in protected joint financial accounts opened in Florida.

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People trying to avoid judgment creditors often try to convert assets to cash and plan to hide the cash from discovery. Clients have told me from time to time about very creative strategies to hold and spend cash off the books. One client recently explained that he could convert available cash to a Visa debit card at certain stores around town. There is no limit on the balance he can buy on his Visa card. The store charges a 3% sales commission. The client says that the store does not ask for any form of personal identification including no drivers license and no social security number. Alternatively, many department stores will sell unlimited amounts of credit cards to by used at their own stores with no fee. My client told me that such store cards are sold at establishments such as Walmart and Sams.

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One of my clients who has recently moved to Florida from Delaware suggested he could best protect his cash from creditors by depositing the money in his Delaware bank account. He claimed that a Delaware statute prohibited a creditor from garnishing any money in a Delaware financial institution. I know nothing about Delaware law, but this seemed too good to be true so I decided to check it out on my own time. I found a Delaware statute that states that no creditor can garnish money deposited in a financial institution in the state.(10 Del.C. § 3502.) I found case law as recent as 2007 that stated, "Under Delaware law, bank deposits are exempt, and any attachment directed at a bank is prohibited." The cases explained that the legislature's intent behind the statute was not to protect debtors from their creditors, but instead, to protect Delaware's financial institutions from interruption of their normal business operations from creditor garnishments. I found no language in the statutes or cases that limited this protection to residents of Delaware, and if true, then a resident of any state could shield their money in a Delaware bank.

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A lady contacted me about with a question about garnishment of her paycheck by the federal government because of defaulted student loan. The caller said the government told her they could garnish 10% of her take home pay even though she supported a child, and that Florida Statute 222.11, which exempts from garnishment all wages of a head of household, did not stop the government's garnishment for student loan default. The government cited their authority under 20 U.S.C. 1095(a) which is quoted, in part below.

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