A bomb was dropped today on a roomful of Orlando bankruptcy lawyers who were attending the Central Florida Bankruptcy Law Association’s annual seminar. The newsflash deals with what mortgage companies are doing to snatch the homes of families who are seeking debt relief in chapter 7 bankruptcy court. It all has to do with the wildcard exemption. Let me explain.
Keeping personal property in a chapter 7 bankruptcy has been easier to do ever since the Florida legislature enacted the so-called “wild card” exemption. This exemption gives each individual filing for bankruptcy an exemption allowance of $4,000.00. The exemption can be applied to any property. (Without the wild card, debtors receive an exemption of $1,000.00 per person to shelter their property from the claims of creditors.) There’s only one catch: the person claiming the wild card exemption must give up another exemption: the homestead exemption. This exemption provides an unlimited allowance for the value of homestead property, thereby exempting it from liquidation in chapter 7 bankruptcy. However, in the current economy, many homeowners don’t receive any benefit from this because their homes are underwater – the mortgage debt exceeds the value of the property. So there is no equity value to exempt.
Because the homestead exemption provides no benefit to underwater homeowners, many Orlando bankruptcy attorneys have given up the homestead exemption for those clients, in favor of the more generous wild card exemption. When the owner of the underwater home waives the homestead exemption, the trustee has the legal right to take title to the home. But what good is an underwater home to a bankruptcy trustee? (who, after all, is looking for assets that can be liquidated to pay creditors.) A recent Florida supreme court decision supported the debtor’s right to do this. So, up until now, the strategy of waiving homestead exemption in exchange for the wild card allowance has worked well for chapter 7 debtors. That may change very soon.
Today, one of the panel chapter 7 panel trustees informed Orlando bankruptcy lawyers that there is a new program among the banks and mortgage lenders. It works like this: when banks and mortgage lenders learn that the debtor has waived their homestead exemption, they offer the trustee cash in exchange for the title to the property. They may offer several thousand dollars, even though the house is upside down and has negative equity. Why? Because it is a cheaper and faster way for them to get title to the property. They get title to the home without going through a foreclosure lawsuit with the homeowner. The program is great for trustees, because they are looking for cash to pay creditors. They are happy to trade an upside down house for cash money – a deal with the devil was never sweeter! The bank gets to buy your house for a few thousand dollars, which is then used to pay the credit card companies. They can do this even if you have never missed a payment on the mortgage. (Many Orlando homeowners keep their homes in chapter 7 bankruptcy, if they have not defaulted on a monthly payment, simply by continuing to pay the mortgage payments or by reaffirming the debt.
So, just when things were looking a little easier for upside down homeowners in Orlando who need debt relief, the banks have found another way to own the houses they lent too much money on. We’ll see if this program catches on, but for now, beware to homeowners and the Orlando bankruptcy lawyers who are trying to help them hang on to as much as they can in chapter 7 bankruptcy. If you trade your exemption on an underwater home worth less than zero, for a more generous allowance on personal property, then it may cost you your home.