Q: Can I protect my house in bankruptcy?
First, you need to have either owned your current primary residence (homestead) for at least 1,215 days before the bankruptcy filing, or if you sold a prior homestead residence in Florida, the 1,215 days is cumulative so that you can claim the full 100% homestead exemption. By “100%” we mean that 100% of your equity in the homestead will be protected from creditors and shielded from the bankruptcy trustee.
Although the homestead is generally based on the Florida constitution, if you own your homestead for less than 1,215 days (singularly or cumulatively with a prior homestead), federal law will hammer the value of your homestead exemption to protect no more than $189,050.00 (for cases filed between April 2022 and March 2025). The feds will lower the hammer on your exemption to $189,050.00 if you committed bankruptcy fraud or some other crimes, but it’s safe to say that if you were caught doing that, this would be the least of your problems. (The statute, if you want to read it, is 28 U.S.C. 522(p) and (q).)
Suppose you only purchased your homestead a year ago for $400,000 and you have a $150,000 mortgage on it? Your approximate equity would be about $250,000, and your “exposure” to the bankruptcy trustee would be about $60,950 (i.e., $250,000 -$189,050) . If you didn’t have any other bankruptcy exemptions available to you to protect that equity, the bankruptcy trustee could force a sale of your homestead to get at (“liquidate”) the $60,950 bankruptcy estate’s portion of the property.
Florida Tenancy By the Entireties. All is not lost, even if you don’t have a strong homestead exemption, if you would have purchased the property with your spouse (ordinarily the deed would read “John Smith and Mary Smith, His Wife” or similar language). The property would have had to have been purchased together at the time you were lawfully married, to fully protect the property utilizing a property right (in this case used as an exemption) known as Tenancy By the Entireties.
The beauty of “T by E” (as it is often called) is that there is no durational threshold you need to meet nor is there a dollar value limit on it. In theory, you could own a T by E property with a million dollars in equity that will still be protected. This valuable exemption applies to both real and personal property in Florida. But you must be married at the time the exemption is being used.
Minimal Equity in your Real Estate Property. Although this isn’t technically an exemption, bankruptcy trustees routinely “abandon” property back to the bankrupt debtor when a liquidation will not be cost-effective for the bankruptcy estate. Unprotected property that is of inconsequential value is routinely abandoned by trustees. This goes for both real and personal property that cannot be shielded by a bankruptcy exemption. Suppose in addition to your homestead, you also owned a vacant lot in Wisconsin that was worth about $1500, but you had annual taxes to pay and have tried to sell it with no luck. There’s a good chance that your bankruptcy trustee would abandon the estate’s interest in this property, because it is likely to be much more of a burden than a benefit to the estate, with the costs of sale minimizing any chance for a meaningful return to creditors. This happens a lot with timeshares as well, but many other kinds of properties that may have more sentimental value that fair market value.
When we say “inconsequential value” we are of course referring to your equity in the asset. Supposing you owned real estate that did not qualify as a homestead and – because you’re an eligible bachelorette – it doesn’t qualify for a T by E exemption. Now suppose also that the property is worth $400,000, but you recently purchased it with a first mortgage in the amount of $320,000 and a second mortgage in the amount of $80,000. There would be no equity for the trustee to liquidate (secured mortgagees would get paid first) and so the trustee would abandon the estate’s interest in the property back to you.
There are lots of close calls here when a trustee is deciding whether to abandon property. Your mileage will vary based on the economy, the mood of the trustee, and how much profit the trustee could hope to realize by selling the asset. A general rule of thumb in South Florida (this is an art not a science and is subject to change based on the above factors) is that the estate ideally needs to net about $3,000 after costs of sale to warrant the administration of an “asset estate.” Be warned: we have seen trustees demand turnover of income tax refunds in the range of $2,000 sometimes. There is very little cost and effort in intercepting an income tax refund.
Yet, there can be large enough swings in the value of real estate to create uncertainty. Trying to predict whether or not a trustee can net $3,000 (if it’s really a close call) will likely result in abandonment. The margin of error needs to be large enough on the sale of realty for a trustee to factor in typical closing costs such as 5 – 6% real estate broker commissions, etc. The trustee will be looking for a much larger projected “pay day” than $3,000 on a real estate transaction.