The new bankruptcy law leaves lots of room for interpretation --and unintended consequences.
Many provisions of the new federal Bankruptcy Abuse Prevention and Consumer Protection Act were written with Florida in mind. State law had created a generous, "unlimited" homestead exemption to the U.S. Bankruptcy Code. Wealthy debtors protected assets by buying lavish homes here that the exemption kept out of creditors' reach.
The new law -- a 500-page amendment to existing bankruptcy statutes that President Bush signed in April -- limits state homestead exemptions in several ways. One provision states that a debtor who files for bankruptcy can't shield more than $125,000 in home equity from creditors if the debtor acquired the home within three years and four months before the bankruptcy.
But an early case indicates the law won't be easy to interpret and will affect average-Joe Floridians along with wealthy reprobates.
Elona Kaplan, a divorcee, moved from New Jersey to a condo in Sunny Isles Beach in Miami in April 2003, looking to make a fresh start. But she couldn't find a job and racked up big credit card debts. This May -- less than a month after the president signed the law and triggered the new homestead provisions -- she filed for Chapter 7 bankruptcy.
In liquidating her assets, Kaplan claimed her condo was exempt. She had paid $178,000 for it two years earlier. At the time she filed for bankruptcy, her mortgage balance was $181,000. She valued the condo at $280,000, meaning her equity was well under the $125,000 cap.
The bankruptcy trustee, with an eye on south Florida's white-hot real estate market, ordered a new appraisal, however. It reflected a market value of $350,000, meaning Kaplan had up to $169,000 in equity. Thomas Messana, an attorney for the trustee, argued that all the equity over $125,000 should go to creditors.
Kaplan's lawyer argued the old exemption is still valid, however, pointing to a June ruling by an Arizona bankruptcy judge who found the $125,000 cap doesn't apply in states such as Arizona and Florida that had opted out of federal exemptions.
Chief U.S. Bankruptcy Judge Robert A. Mark of the Southern District of Florida didn't buy that argument, ruling that "there is absolutely no doubt that the statute was intended to apply in all states." But Mark also complained that the new law "is not a model of clarity." Implementing it, he wrote, "will present a daunting challenge to judges, clerk's offices, attorneys and the parties who seek relief " in bankruptcy court, particularly when it comes to issues such as calculating available exemptions and how to handle appreciation of property.
Indeed, Florida bankruptcy lawyers within the same firms disagree whether Congress really meant to force people like Kaplan to sell their homes. (It was uncertain at press time whether she would have to sell.) "If the real estate market continues to rise, houses will have appreciated so much that there may be equity available for people to buy their way out of this problem," says Messana, of Ruden McClosky in Fort Lauderdale. "But if not, people may be forced into situations where they have to sell a home or refinance with less-favorable interest rates. There's a lot of disagreement about whether Congress would have purposefully put debtors seeking relief into that sort of situation."