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Bankruptcy in the Era of COVID-19 - Part 2

May 18, 2020 | Category: Asset Protection, Estate Planning and Probate, Firm News, News


This is Part 2 of a series on Bankruptcy.  Our first article discussed the differences between Chapter 7 (Liquidation), Chapter 11 (Reorganization) and Chapter 13 (Wage Earner Plan). If you want to review Part 1, click HERE.

This Part 2 will discuss residency, its effect on your ability to choose State or Federal exemptions and the Florida homestead exemption. 

Florida has an extremely generous exemption statute.  Cash value life insurance, annuity contracts, qualified retirement plans, IRAs, wages payable to a head of household and disability benefits are exempt from general creditors without limit.  Florida also exempts the homestead without value limit, but there are size restrictions.

In Bankruptcy, most States allow their residents to choose between State law exemptions (and selected Federal exemptions) or just the Federal exemptions. These states fall within the “opt-in” category.  Florida is an “opt-out” State.  This means that Florida residents must use the Florida exemptions.  In general, the Florida exemptions are far better than the Federal exemptions.

In order to be treated as a Florida resident, you must have resided in Florida for at least 730 days (2 years) before filing for Bankruptcy.  If you do not meet this requirement, the law looks to where you resided for the 180-day period immediately prior to the 730-day look-back period (days 731-910).  If you resided in more than one State during this 180-day period, the State where you lived the most in this period determines your residency.

Since most States have a far less generous exemption statute than Florida, it pays to be a Florida resident in Chapter 7 (Liquidation) bankruptcy because you generally keep your exempt assets and only the non-exempt assets are available to pay your debts. 

There is one big exception – the homestead.  A debtor who has not owned his/her homestead for 1,215 days is limited to a cap of $170,350. This will increase by the COL changes shortly.  If both spouses file jointly for Bankruptcy, the cap is double.  Equity in excess of the cap is non-exempt and is vulnerable to creditors. 

In order to avoid this issue, a married couple can take title to their homestead as “tenants by the entirety”, if the couple does not have any joint liability to a common creditor.  In this case, homestead owned as tenants by the entireties does not become part of the Bankruptcy estate, and therefore, it is not available to general creditors.

There is also a 10-year lookback period for excess mortgage payments made with intent to hinder, delay or defraud a creditor. For example, the debtor paid off his mortgage on the homestead during this period with intent to hinder, delay or defraud a creditor and filed for Bankruptcy.  The amount so paid can be set aside and used to pay creditors.  If the excess payment is made within one year of filing for Bankruptcy, the debtor may be denied a discharge.  This means that he or she continues to owe monies to unpaid creditors.

Part 3 will address executory contacts and how to protect non-exempt assets in an LLC and limited partnership.

Stay safe.  Stay well.

We are all in this together! We will get through this, together!

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