Florida Bankruptcy Law Blog

Court Challenges Exemption of Inherited IRAs

Most people, including myself, understood that all IRAs were exempt from creditors outside of bankruptcy and were exempt from the bankruptcy estate for debtors who filed bankruptcy. I received an email from attorney Tye Klooster about an Illinois bankruptcy case which holds that some IRAs are not exempt. If followed in Florida bankruptcy courts this ruling would diminish IRA protection for Florida residents

Illinois, like Florida, has state statutes which exempt IRAs from creditor collection process. The Illinois statute and the Florida statute protect IRAs that are "exempt from taxation" under Section 408 of the Internal Revenue Code. This Illinois bankruptcy judge said that IRAs which a beneficiary inherits after the death of the owner are not exempt from taxation because the inherited beneficiary is not able to make tax deferred contributions to the IRA and cannot roll over the IRA tax free to a subsequent beneficiary. The judge concluded that inherited IRAs are not within the class of IRAs protected by the Illinois statute or the bankruptcy law.

If this reasoning is followed by Florida courts it could significantly impact asset protection planning for Florida residents in or out of bankruptcy.

The case is In re Taylor, decided May 9, 2006, in the central district of Illinois. Bankruptcy Case No. 05-93559

Protecting Successive Florida Homesteads in Bankruptcy

A reader asked me to address a situation where a Florida resident owned a homestead property for 30 months and sold the house. Within a reasonable time after the sale, he bought a new homestead where he then lived for 45 months prior to filing bankruptcy. The question is whether the reader would in bankruptcy get Florida’s unlimited homestead protection which is available for people who have owned their homestead for 40 months or more.

The new bankruptcy law specifically addresses this situation. The law provides that previous ownership of a homestead in the same state can be tacked on the time of ownership of the existing homestead. So, if this person first house and transfers the net proceeds into the second house he will be deemed to reside 45 months in his Florida homestead when he files bankruptcy. Again, both homesteads must be located in Florida to combine time residence.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Which Homestead Exemption Applies to Filing Prior to October, 2005?

Bankruptcy cases involving debtors who file bankruptcy after recently moving to Florida involve interesting issues. I discussed with another bankruptcy attorney this week a debtor who filed bankruptcy in September, 2005, one month before most provisions of the new law went into effect. He invested about $70,000 in a Florida homestead one year prior to filing and about the same time he had moved to Florida from a state with a small homestead exemption of $25,000. The homestead provisions of the new bankruptcy Act which limit Florida debtors to no more than a $125,000 if they purchased their homestead within 40 months of filing went into effect in April, 2005, when the Act was passed. A trustee argued that since he purchased the homestead after April, 2005, all homestead issues are under the new bankruptcy law. One part of the new bankruptcy law says that if you move to Florida within two years of filing bankruptcy in Florida, your exemptions are determined under the laws of the state you came from. The Trustee concludes that as to this debtor’s homestead, his exemption is limited to the $25,000 applicable in the state of his previous residence.

I think the trustee argument confuses the effective dates of difference provisions of the bankruptcy Code. The new bankruptcy law become effective on October 17, 2005 with certain exceptions spelled out in Section 1501(b)(2) of the Act. One of the exceptions was the $125,000 homestead limit. However, the Code section that applies exemptions of a prior state residence to debtors who moved to Florida more than 180 days prior to filing is part of a different section of the Act, and that different section was not one of the sections which became effective in April, 2005. As this person filed bankruptcy prior to October, 2005, and more than 180 days after moving to Florida, his bankruptcy was under the Florida homestead exemption which after April, 2005, gave this debtor a $125,000 exemption. Therefore, I believe, the debtor’s investment of about $70,000 in his new Florida homestead should be exempt. We’ll see.

Fradulent Transfer Question

Consider a man and his wife who moves from Georgia to Florida and purchase a homestead for $100,000 cash. Title to the homestead is in the name of the husband only. After he and his wife reside in the new home for a few months, the man gets an equity line second mortgage. He uses $50,000 of loan proceeds to purchase an investment property title to which is taken in the wife’s name only. A year later, the man encounters severe financial difficulty and files chapter 7 bankruptcy. Because he has not lived in Florida for two years prior to filing he is not eligible for Florida bankruptcy exemptions and must file with Georgia exemptions even though he is a Florida resident. Georgia has a relatively small homestead exemption which I’ll assume is $10,000. (exact amount is not relevant ). Therefore, only $10,000 of his homestead is an exempt asset in bankruptcy. The issue is whether the equity line loan used to purchase the $50,000 property for his wife is a fraudulent conveyance of $40,000 subject to attack in the bankruptcy.

I don’t know of any judicial decisions on point with this situation.. Whether a transfer is a reversible fraudulent transfer depends on the debtor’s intent. Facts and circumstances are evidence of intent, but there is not formula of fact to infer intent in every case; each case must be examined under its own facts.

Looking at the transaction solely within the bankruptcy context, there has been a conveyance to the wife of non-exempt equity to of $40,000 within a short time prior to bankruptcy. Yet, at the time the transfer occurred the man was under Florida’s unlimited homestead exemption law, and at that time his transfer of money to his wife was the transfer of proceeds from an exempt homestead. This case presents the question of whether a transfer of exempt property to another person can subsequently be reversed as a fraudulent conveyance if the transferor files bankruptcy and where the same asset transferred is not exempt under the bankruptcy law.

A bankruptcy trustee or bankruptcy judge could rule that the transfer of an asset not exempt in the bankruptcy context may be a fraudulent transfer. In my opinion, subject to finding a contrary decision, is that the transfer is not a fraudulent transfer because at the time of the transfer the asset was exempt homestead. The transferor/debtor could not have intended to make a transfer to avoid creditors if he did not then anticipate bankruptcy and knew that the asset would not be exempt in bankruptcy.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Is There Florida Homestead Protection in Canadian Bankruptcy

A Canadian man called me to discuss a bankruptcy he filed in Canada. The gentleman owned a parcel of real property on the west coast of Florida. He asked me if the property would be exempt from his Canadian bankruptcy proceeding under Florida’s homestead laws. He said he lived in Florida half the year, and that the house was his primary U.S. residence.

I told him his Florida property would not be protected in his Canadian bankruptcy for several reasons. He cannot get Florida homestead protection because he is a resident of Canada, and not a resident of the U.S. or Florida. Assuming Canadian bankruptcy laws are similar to U.S. laws, the bankruptcy court would have jurisdiction over the Florida property as bankruptcy captures all of the debtor’s assets regardless of their location anywhere in the world. If he tried to claim the property as Florida homestead, he could not file bankruptcy in Canada as his primary residence would be in the U.S.

posted by Jonathan Alper, bankruptcy and asset protection lawyer, Orlando, Florida