NCPA - National Center for Policy Analysis

Homestead Exemption Favors Bankrupts

June 2, 2000

In certain states having homestead exemption laws, some people facing bankruptcy rush out and buy multimillion dollar homes -- since the laws allow them to keep their homes even though they are otherwise dead broke and owe their creditors money. Now Congress is about to increase the appeal of such homes to rich folks who may not face imminent bankruptcy -- but see it as a possibility if they lose a big lawsuit.

  • Five states -- Florida, Texas, South Dakota, Iowa and Kansas -- have unlimited homestead exemptions on their statute books.
  • People facing financial difficulties who live in New York -- where the exemption is only $10,000 -- often move to Florida or Texas (but rarely to the other states) and buy expensive homes for cash before filing for bankruptcy.
  • To discourage that practice, the Senate has voted to cap the homestead exemption at $100,000 -- but the House bankruptcy reform bill has no such provision.
  • A compromise that is emerging would make the unlimited Florida and Texas exemptions available only to those who have lived in the states for at least two years before filing for bankruptcy.

And even for them, the exemption would be limited to the amount of equity that the person had in the home two years before filing, plus $100,000. The bill also would put a limit of $1 million a person can squirrel away in individual retirement accounts immune from creditors.

But it won't do anything about a myriad of other ways -- often involving trusts -- that money can be protected from creditors.

Source: Floyd Norris, "The New Bankruptcy Reform: Make the Rich Plan Ahead," New York Times, June 2, 2000.

 

Browse more articles on Economic Issues