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Should the Homestead Exemption Be Limited

As of June 2002, six states, including Florida and Texas, provide an unlimited household exemption that allows bankrupt debtors to shield unlimited amounts of equity in a residential estate. The unlimited exemption has come under increased scrutiny in recent years as a number of public figures as well as noted wrongdoers have taken advantage of the unlimited exemption to shield significant amounts of wealth from creditors. For example, a prominent actor who was declared bankrupt in 1996 was allowed to keep a $2.5 million estate located in Hobe Sound, Florida, and a corporate executive convicted of securities fraud kept his Tampa, Florida, mansion from the claims of his creditors in bankruptcy, including federal regulators seeking to collect civil fines. When the Enron and WorldCom corporate scandals broke in 2001 and 2002, the media called attention to a $15 million mansion under construction in Boca Raton, Florida, for the former CFO of WorldCom and to a $7 million penthouse owned by the former CEO of Enron as well as to the fact that the liberal exemption laws in Florida and Texas might be utilized by them to protect a significant amount of their wealth against claims from creditors and regulators.
As noted above, in the 2005 act, Congress took some steps to limit the ability of debtors to shift assets into an expensive home in a state with an unlimited household exemption shortly before filing for bankruptcy and also to limit the exemption for debtors convicted of violations of the federal securities laws. While the act was pending in the conference committee, a group of about 80 law professors who teach bankruptcy and commercial law wrote to the committee urging that it adopt a hard cap on the homestead exemption contained in the Senate version of the bill. They pointed out the fundamental unfairness created when residents of one state can protect in a supposedly “uniform” federal bankruptcy proceeding an asset worth millions while residents in other states face sharp limitations on what they can protect. As an example, they noted that a wealthy investor in Texas could keep an unencumbered home worth $10 million while a factory worker in Virginia puts at risk anything over $10,000 in equity.
The law professors described various ways that the formulation the conference committee had adopted could be gamed. They also asserted that the provisions to limit the homestead exemption for those who violate securities laws, who commit fraud while in a fiduciary capacity, or who commit certain felonies or intentional torts were too tightly drawn and would create a “playground of loopholes for wealthy individuals and clever lawyers.” They noted, for example, that the provisions “would not cap the homestead exemption for someone who finds a dozen ways to bilk the elderly out of their money, someone who takes advantage of first-time home buyers, or someone who deceives people trying to set up college funds for their children.”
Should Congress adopt a uniform cap on the homestead exemption?