One thing I enjoy about practicing bankruptcy law is the predictability and mechanics of the practice and the process. One very big exception at the moment is how we should be treating the client’s Florida home that is worth less than what is owed, but that they want to keep.
Before anyone could imagine a day where homes were worth less than their mortgages, Floridians enjoyed the sometimes incredibly generous Florida Homestead Exemption in bankruptcy. That exemption, with a few exceptions, protects all the equity in the client’s primary residence from the reach of creditors. If a client did not own a home that they were going to keep, they got to use a different exemption we call the Wildcard, which allows them to keep another $4,000.00 (double that for married filers) worth of value in personal property.
The Wildcard was originally meant to be the bone thrown to non-homeowner bankruptcy debtors in Florida. Then we have our housing crash that began in the summer of 2007, and the big question quickly came to be whether the homeowner with no equity could also use the Wildcard. The bankruptcy judges throughout Florida were somewhat divided, but in Orlando it was made clear that you could not use the Wildcard if you were keeping the home.
In February, 2011 the Florida Supreme Court answered with an opinion in the case Osbourne v. Dumoulin (SC09-751). They said that the Wildcard may be used by everyone, but by using it, the homeowner is opening up the possibility of the bankruptcy trustee doing something with the home for the benefit of the creditors. So all the consumer bankruptcy attorneys said “Cool!” since trustees do not traditionally bother with assets that are secured past their value and started using the Wildcard on assets not typically protected in the past with homeowners, like paid-for cars and tax refunds, and that has worked pretty well until recently.
Some mortgage holders have caught on and have started offering trustees a payment to be administered in the bankruptcy estate in exchange for the trustee signing the house back over to them. In bankruptcy, if the debtor does not exempt their home, regardless of whether there is equity, they are legally giving ownership of the property, with all rights related to it, to the trustee whose job is to administer assets for the benefit of the creditors. If the trustee does not abandon the asset because it has no available value, the debtor has given away their rights to possess and occupy the home for $4,000 (or up to $8,000 for married filers). Many folks are now deciding that they don’t want to take that chance.