Saving a home and keeping property are key concerns of people who are considering bankruptcy. Most homeowners are relieved to learn that the Florida homestead exemption allows them to keep 100% of their home equity. Without a doubt, a homeowner can keep their home even while discharging their debts. However, many homeowners have misunderstandings about the extent to which they can use their homes to avoid having to surrender property in a bankruptcy. That is because of changes that took place when the Bankruptcy Code was overhauled by Congress in 2005.
Before these changes, the Florida homestead exemption offered very generous protection for debtors who used their homes to shelter assets from creditors (for example by using them to pay down a mortgage, or to improve the property.) A debtor’s home was almost invincible from the claims of creditors, even when they transferred non-exempt assets into their homestead property with the intent to defraud a creditor. Using this generous exemption for Florida homestead property, many people would plan for a bankruptcy by selling property that they would otherwise have to surrender, and using the cash to pay off, or pay down a mortgage on their homestead property. Because of the broad protection created by the Florida homestead exemption, many people were even moving to Florida to do their bankruptcy.
Congress outlawed this practice in 2005, when it changed the laws to make it harder for individuals and families to get debt relief under the Bankruptcy Code. The new law allows a bankruptcy judge to reduce the value of the homestead exemption, if she determines that the value was created by a “fraudulent transfer.” A “fraudulent transfer” is one that is intended to defeat the claims of creditors. There is a look back period of 10 years. This means that the judge can examine any transfer of property during the 10 years before the debtor’s files their petition, to determine if it was used to hide assets from creditors by placing the value of the property into a homestead property.
You can read a recent case decided by a Florida bankruptcy judge involving this issue here. If you are considering paying off or paying down a mortgage with the intention of improving your standing with creditors, you should first seek the advice of an experienced bankruptcy attorney.