Homestead Court Decision

A bankruptcy court in Tampa issued an interesting decision on the extent of homestead protection in Florida under the new bankruptcy law. The new bankruptcy law limits homestead protection of Florida bankruptcy debtors to $125,000 if they acquired their homestead interest within 1215 days prior to filing bankruptcy. Florida bankruptcy debtor’s who acquired their homestead prior to 1215 days of bankruptcy have unlimited homestead exemption under the Florida Constitution.

The new bankruptcy Code does not specify whether spouses filing jointly are entitled to aggregate separate $125,000 exemptions, and the Code did not fully define the type of legal and financial interest subject to the $125,000 cap. The Tampa bankruptcy court held that a husband and wife filing a joint bankruptcy petition may aggregate separate $125,000 homestead exemptions so that in a joint bankruptcy filing the spouses may exempt a total of $250,000 of homestead interest acquired within 1215 days of filing. The court further defined the "interest" subject to the applicable caps to exclude appreciation in value during the 1215 day period. So, for example, if a single debtor paid $100,000 down payment to purchase a homestead within 1215 days of filing, and that during the same period, the value of his homestead appreciated by another $100,000, the debtor could exempt in bankruptcy the total equity of $200,000.

If, on the other hand, assume the same debtor had no post-purchase appreciation, but prior to filing and within the 1215 day period he paid an additional $100,000 cash to reduce his principal mortgage balance so that on filing date he had $200,000 equity ($100,000 down payment and a subsequent $100,000 principal reduction). The bankruptcy court said that under those circumstances the debtor’s homestead exemption would be $125,000, and the debtor would have $75,000 non-exempt and unprotected equity in the homestead.

Of course, if the debtor in this example did not file bankruptcy his entire homestead equity would be protected from creditors regardless of his investments of cash in the property. If all cash investments were made prior to 1215 days of filing bankruptcy, the entire homestead interest would be protected in bankruptcy (with some exceptions).

The case is In re Rasmussen, issued September 6, 2006, by Judge Williamson.