Homeward Bound through the Wild, Wild South: The Application of Florida’s Wild Card Exemption on Homestead Property in Bankruptcy
Once a successful entrepreneur, Debtor Dan has recently fallen on hard times after the promising investors on Shark Tank refused to invest in his business, Wonderful Widgets.1 Debtor Dan’s expectation for his successful financial future tanked, and he quickly saw his bills and debts rising higher than Shark Tank ’s ratings. Ultimately, Debtor Dan decided to file for bankruptcy. Initially, Debtor Dan planned to file for relief under Ch. 13 of the Bankruptcy Code and claim a wild card exemption on his schedules. However, after an informative meeting with his knowledgeable lawyer, who unfortunately had not had an opportunity to read the 11th Circuit’s opinion In re Valone, 784 F.3d 1398 (11th Cir. 2015), Debtor Dan was told that he would not be able to claim the wild card exemption in a Ch. 13 case, even if he did not claim the homestead exemption.
Justifiably confused by this new development, Debtor Dan objected and insisted that his neighbor, Debtor Debbie, filed for bankruptcy, didn’t claim her home as exempt, and was able to claim the wild card exemption. Thereafter, Debtor Dan wondered why he could not do the same.
The lawyer quickly replied in fluent legalese that Debtor Debbie most certainly filed for relief under Ch. 7 of the Bankruptcy Code because in Ch. 7 cases the application of the wild card exemption rests on the liquidation process and, thus, differs greatly from Ch. 13 cases in which nonexempt property is retained and treated under a plan. After injecting some other complex terms, followed by more confusing legal lingo, the lawyer finally sensed Debtor Dan’s concern and added that this distinction in applicability of the wild card exemption has challenged both lawyers and the courts because it is based on the fundamental difference and purpose of Chs. 7 and 13 of the Bankruptcy Code.
Exemptions under Florida Law
The Bankruptcy Code provides protection for certain assets once an individual debtor becomes involved in the bankruptcy process. Specifically, §522(b) of the Bankruptcy Code authorizes individual debtors to exempt property from the bankruptcy estate to shelter it from the reach of the debtor’s creditors. Bankruptcy Code exemptions can be chosen in any chapter under which an individual can file — 7, 11, 12, or 13. Nevertheless, Congress allowed the states to override the federal bankruptcy exemptions to permit a debtor to take only those exemptions given under the state’s exemption laws.2 That way, the states, by a specific legislative act, can restrict bankruptcy debtors’ options to electing exemptions available under state and nonbankruptcy federal law.
Florida, among other states, has opted out of the exemptions available under the Bankruptcy Code in favor of utilizing its own exemptions.3 In Florida, state law determines which property a debtor may exempt from the bankruptcy estate.4 For instance, Fla. Const. art. X, §4 grants Floridians a homestead exemption in an unlimited dollar amount for residential real property that does not exceed one-half acre, if located within a municipality, or 160 acres, if located outside of a municipality.5 The homestead exemption provides that a person’s homestead is exempt from forced sale “so that the homeowner and his or her heirs may live beyond the reach of financial misfortune and the demands of creditors.”6 This legal doctrine was intended to promote the stability and welfare of the state.7
In addition, Florida residents are entitled to other exemptions that can be generally found in F.S. §222.01 et seq. An exemption of the utmost importance to our friend Debtor Dan is the wild card exemption. The wild card exemption, also known as an enhanced personal property exemption, allows individuals to exempt up to $4,000 in personal property if they do not “claim or receive the benefits of” the homestead exemption.8 The purpose of the wild card exemption is to give extra personal exemptions to debtors who do not benefit from the homestead protection.9 The drafters of this statutory exclusion used the phrase “receive the benefits of” to ensure that a debtor who does not affirmatively claim the homestead exemption must not be able to indirectly receive its benefit while claiming the wild card exemption.10
Such indirect receipt of the Florida homestead exemption may arise in a joint filing if one spouse claims the wild card exemption while the other spouse claims the homestead exemption.11 It may also occur if the filing spouse claims only the wild card exemption while the nonfiling spouse retains homestead rights with respect to creditors. In such instances, the retention of the homestead rights by one spouse necessarily benefits the other spouse with respect to the benefits of the exempt status of the jointly owned homestead.12 While these scenarios may seem obvious when examining whether a debtor indirectly receives the benefit of the homestead exemption, other situations are not as clear-cut. Therefore, in interpreting this phrase, it is necessary to understand the bankruptcy process and how it differs in each chapter and each individual case.
Chapter 7
The purpose of a Ch. 7 case is “to administer efficiently the liquidation of the estate for the benefit of the creditors.”13 T he property comprising the bankruptcy estate is broadly defined by §541(a) of the Bankruptcy Code and includes “all legal or equitable interests of the debtor in property as of the commencement of the case.”14 Property that is claimed as exempt is later removed from the estate.15 The trustee then administers the estate by collecting and selling the debtor’s nonexempt property and distributing the proceeds of such sales among the debtor’s creditors.16 In theory, a debtor’s exempt property would be the only property that he or she could keep in a Ch. 7 case.17
With these principles in mind, Florida bankruptcy courts struggled with the interpretation of §222.25(4)’s phrase “receives the benefits” in the Ch. 7 context, causing a split on this issue. At first, courts interpreted the homestead exemption in terms of home ownership. As such, these courts held that a debtor who owns homestead property, lives in it, and intends to retain it receives the benefits of the homestead exemption’s protections regardless of whether he or she claims it as exempt, thus, precluding the debtor from claiming the wild card exemption.18 Under this broad view, debtors who are eligible to claim the homestead exemption are automatically deemed to have received the benefits of the exemption unless they indicate a clear intent to abandon the homestead property.19 However, other courts developed a more narrow view, finding that debtors could claim the wild card exemption without abandoning the homestead property.20 These courts concluded that the benefits of the homestead exemption are not conferred on a debtor who does not affirmatively claim the homestead exemption and instead leaves the home available for administration by the Ch. 7 trustee.21 Under this view, a debtor’s failure to claim the homestead exemption leaves the homestead subject to administration for the benefit of creditors, and the home is no longer protected from forced judicial sale.22
Ultimately, the Florida Supreme Court resolved this conflict and held that a debtor loses the benefits of the homestead exemption when the homestead becomes subject to administration by the bankruptcy trustee, regardless of whether the trustee decides to abandon the homestead property and leave it in the debtor’s possession.23 In so holding, the Florida Supreme Court determined that the term “benefits” in §222.25(4) refers “only to the protection of the homestead from the reach of creditors.”24 As such, the Florida Supreme Court effectively excluded those advantages that are incidental to home ownership — such as equity, tax exemptions, and physical possession — from the definition of “benefits” in §222.25(4), as these advantages are not benefits that derive from the constitutional homestead exemption.25 In fact, a Ch. 7 debtor does not receive the benefits of the homestead exemption — and, therefore, is entitled to the wild card exemption — when he or she specifically intends on retaining his or her home but does not claim the home as exempt homestead property.26
This Florida Supreme Court decision underscores the fundamental nature of a Ch. 7 case in which property of the estate is subject to liquidation. Accordingly, a debtor who does not claim property as exempt surrenders that property to the trustee for administration. doing so, the debtor loses the benefits of the homestead exemption, even if the debtor intends to remain in the home or retain the property.27 The same reasoning applies equally to cases in which the trustee is unlikely to administer the property because it lacks value for the estate.28 Therefore, in a Ch. 7 case, a debtor is entitled to claim the wild card exemption if he or she does not claim the homestead exemption. The same may not be said, however, for debtors who seek relief under Ch. 13, as the duties and benefits of the debtor are part and parcel of the payment-plan process by which creditors’ claims are satisfied in a Ch. 13 case.
Chapter 13
While the purpose of Ch. 7 is to provide debtors with a fresh start by liquidating the debtor’s nonexempt assets,29 C h. 13 has a completely different purpose. It is a future-looking process that facilitates the repayment of debts by an individual with regular income who remains in possession of all of the property of the estate, both exempt and nonexempt30; that is, a Ch. 13 debtor can pay his or her debts over time without having to liquidate any assets.31 In most cases, it allows debtors to cure defaults and arrearages on their secured debts, enabling debtors to save their homes and vehicles.
Although Ch. 13 debtors are entitled to claim property as exempt, the purpose of those exemptions is not the same for Ch. 13 debtors as for Ch. 7 debtors.32 In Ch. 13, exemptions determine the amount of payments a debtor must make under his or her Ch. 13 plan to satisfy the confirmation requirements under Bankruptcy Code §1325.33 This determination sets the minimum amount that creditors must receive in non-Ch. 7 cases.34 Under §1325, a debtor’s Ch. 13 plan must provide for the distribution to each unsecured creditor of an amount not less than the amount that would be paid if the debtor had filed for Ch. 7.35 So failing to claim property as exempt in a Ch. 13 case does not mean that property is subject to administration by the Ch. 13 trustee.
In fact, the duties of a Ch. 13 trustee, unlike a Ch. 7 trustee, do not include liquidating property of the estate.36 Rather, a Ch. 13 trustee is charged with ensuring the debtor’s compliance with the Ch. 13 plan.37 Because Ch. 13 does not involve liquidation of property of the estate, homestead property is never surrendered for administration by the Ch. 13 trustee.
It is this distinction — i.e. , that nonexempt property is not subject to administration by the Ch. 13 trustee — that Florida bankruptcy courts have found fundamental in determining that the wild card exemption is not applicable in Ch. 13 cases.38 In Ch. 7 cases, a debtor loses the benefits of the homestead exemption once he or she fails to claim the homestead exemption because nonexempt property is subject to liquidation and the protection against forced sale by creditors ceases. But a Ch. 13 debtor’s homestead will never be subject to administration, regardless of whether the debtor claims it as exempt.39 In other words, the homestead property is protected upon the filing of a Ch. 13 petition, even if the debtor did not claim the homestead property as exempt on his or her schedules. Specifically, upon the filing of the Ch. 13 case, the debtor might choose between two options: keeping the homestead property and continuing to pay mortgage payments or surrendering the homestead property to the lender. If a Ch. 13 debtor elects to keep the residence, it will be protected from forced sale by the operation of the automatic stay throughout the duration of the confirmed plan.40 Florida bankruptcy courts reasoned that such a result constitutes receiving the benefits of the homestead exemption during the pendency of the Ch. 13 case, which precludes claiming the wild card exemption despite failing to assert the homestead exemption.41
The 11th Circuit, however, decided that initiating a Ch. 13 case does not necessarily mean that a debtor automatically receives the protection of the homestead exemption — and forgoes the wild card exemption — when the homestead exemption is not claimed.42 In reaching this conclusion, the court commenced its analysis by applying rules of statutory construction to §222.25(4) to resolve the long-spanning debate regarding what it means to “receive the benefits” of Florida’s constitutional homestead exemption.43 In doing so, the court compared the process of a Ch. 7 case with the process of a Ch. 13 case and focused on one specific aspect: the source of protection. Generally speaking, pursuant to §362 of the Bankruptcy Code, commencement of a bankruptcy case operates as a stay of a broad range of specific acts against the debtor or the property of the estate, including the forced sale of a residence. In a Ch. 13 case, the automatic stay is the mechanism that protects the home from the reach of creditors. As such, a debtor’s homestead property is protected regardless of whether the homestead exemption is claimed, but the homestead exemption may not be the mechanism that protects it. Accordingly, the 11th Circuit ultimately concluded that receiving the protection of the automatic stay during the pendency of a Ch. 13 case cannot trigger receiving the benefits of the homestead exemption.44
The 11th Circuit observed that pursuant to §222.25(4), receiving the benefits of the homestead exemption under the Florida Constitution is triggered when the homestead exemption — and the homestead exemption alone — protects the debtors’ residence from forced sale.45 However, during the pendency of a bankruptcy case, the homestead exemption lies dormant.46 Nevertheless, the 11th Circuit did not exclude that, under certain circumstances, receiving the benefits of the homestead exemption may occur during the pendency of a Ch. 13 case. For this reason, the 11th Circuit mandated that bankruptcy courts consider the facts of each case to determine whether it is in fact the Florida homestead exemption that protects the residence from forced sale during the pendency of a case or whether the protection emanates from another source.47
Conclusion
While $4,000 may not mean much or be worth fighting for to an average, financially stable individual, it has proven important enough to divide the bankruptcy courts that address the needs of the financially distressed individuals in bankruptcy cases. Such splits of authority as the one discussed in this article are not uncommon, as the Bankruptcy Code is a complex road map, and its provisions, along with state statutory provisions, constitute fertile ground for many meritorious issues that are routinely brought to the courts’ attention. Fortunately for Debtor Dan, and many other debtors, the 11th Circuit allows a debtor to seek the wild card exemption even when the debtor fails to claim Florida’s homestead exemption. However, as mentioned above, the entitlement to the wild card exemption is a case-by-case determination, which may bring uncertainty to debtors claiming it and may deter them from doing so.
1 Of course, Kevin O’Leary, also known as “Mr. Wonderful,” loved the name but refused to invest unless he could receive 50 percent equity in the company and a royalty share.
2 11 U.S.C. §522(b).
3 Osborne v. Dumoulin, 55 So. 3d 577, 583-84 (Fla. 2011).
4 Id.
5 F la. Const. art. X, §4.
6 Dumoulin, 55 So. 3d at 587-88.
7 Public Health Trust v. Lopez, 531 So. 2d 946, 948 (Fla. 1988).
8 Fla. Stat. §222.25(4).
9 In re Rogers, 396 B.R. 100, 102 (Bankr. M.D. Fla. 2008).
10 In re Gatto, 380 B.R. 88, 92 (Bankr. M.D. Fla. 2007).
11 Id. The homestead property must meet constitutionally defined limitations to qualify for homestead protection. Cutler v. Cutler, 994 So. 2d 341, 343 (Fla. 3d DCA 2008).
12 In re Gatto, 380 B.R. at 92.
13 In re Glados, Inc. ( U.S. Trustee v. Fishback ), 83 F.3d 1360, 1365 (11th Cir. 1996).
14 11 U.S.C. §541(a).
15 11 U.S.C. §541.
16 11 U.S.C. §704(a)(1).
17 William L. Norton, Jr., Norton Bankruptcy Law and Practice §56:3 (3d ed. 2015).
18 In re Magelitz, 386 B.R. 879, 883 (Bankr. N.D. Fla. 2008) (finding that a debtor who does not claim the homestead exemption but intends to retain the home receives the benefit of the homestead exemption); In re Morales, 381 B.R. 917, 920-21 (Bankr. S.D. Fla. 2008) (finding that a debtor may claim the wild card exemption if the debtor does not claim the homestead exemption and files a statement of intention to surrender the property); In re Gatto, 380 B.R. at 95 (finding that debtors who did not claim their home as exempt and surrendered their home did not receive the benefits of the homestead exemption and could, thus, claim the wild card exemption).
19 In re Walton, 503 B.R. 159, 160 (Bankr. S.D. Fla. 2013).
20 In re Bennett, 395 B.R. 781, 788 (Bankr. M.D. Fla. 2008) (stating that “[w]hether a debtor has equity in the property, lives in the home, or enjoys any other types of tax benefits has no relevance to” whether a debtor receives the benefits of the homestead exemption).
21 Id. at 789-90.
22 Id.
23 See 11 U.S.C. §554(a) (stating that a “trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate”); Dumoulin, 55 So. 3d at 588 (finding that the trustee’s decision to abandon the homestead property “does not negate the debtor’s loss of the benefits of the homestead exemption” because the debtor did nothing to prevent the trustee’s administration of the homestead property).
24 Dumoulin, 55 So. 3d at 587.
25 In re Bennett, 395 B.R. at 788 (adopted by Dumoulin, 55 So. 3d at 587).
26 See In re Rodale, 452 B.R. 290, 296 (Bankr. M.D. Fla. 2011) (finding that a debtor who does not claim the homestead exemption but intends to retain the home is entitled to the wild card exemption).
27 Dumoulin, 55 So. 3d at 577.
28 11 U.S.C. §554(a); In re Rodale, 452 B.R. at 296 (finding that the debtor did not receive the benefits of the homestead exemption even though the trustee was likely to abandon the homestead property); Dumoulin, 55 So. 3d at 588 (finding that the trustee’s decision to abandon the homestead exemption “does not negate the debtor’s loss of the benefits of the homestead exemption” because the debtor did nothing to prevent the trustee’s administration of the homestead property).
29 In re Bilzerian ( Bilzerian v. SEC ), 276 B.R. 285, 294 (M.D. Fla. 2002).
30 11 U.S.C. §1306(b).
31 Id.; In re Frausto ( EconoLube N’ Tune, Inc. v. Frausto ), 259 B.R. 201, 211 (Bankr. N.D. Ala. 2000); In re Valone ( Valone v. Waage ), No. 2:13-cv-171-Ftm-38, 2014 WL 970024 at *2 (M.D. Fla. Mar. 12, 2014) (internal quotations omitted).
32 In re Springer, 338 B.R. 515, 520 (Bankr. N.D. Ga. 2005).
33 In re Schrawder, No. 3:13-bk-4067-PMG (Bankr. M.D. Fla. Nov. 20, 2014).
34 Norton, Jr., Norton Bankruptcy Law and Practice §56:3, n. 7 (3d ed. 2015).
35 11 U.S.C. §1325(a)(4).
36 In re Frausto, 259 B.R. at 211.
37 11 U.S.C. §1302.
38 In re Valone, 2014 WL 970024 at *2-3.
39 Id. at *3.
40 Id. at *4.
41 Id.; In re Didelis, 3:14-bk-02966-JAF, 2014 WL 7652894 at *2 (Bankr. M.D. Fla. Jan. 15, 2014).
42 In re Valone ( Valone v. Waage ), 784 F.3d 1398, 1402 (11th Cir. 2015).
43 Id. at 1402.
44 Id.
45 Id.
46 Id. at 1403.
47 Id. at 1401.
Anna Haugen is a judicial law clerk for Judge Jerry A. Funk of the U.S. Bankruptcy Court for the Middle District of Florida, Jacksonville Division. She earned her J.D., cum laude , and LL.M. in comparative law from the University of Florida Levin College of Law. She also holds a master’s degree in law from the University of Warsaw, Poland.
Jessica Ronay is a judicial law clerk for Judge Julie S. Sneed of the U.S. District Court for the Middle District of Florida, Tampa Division. Prior to this, she served as a judicial law clerk for the U.S. Bankruptcy Court for the Middle District of Florida, Tampa Division. She earned her J.D., cum laude, from Stetson University College of Law, where she served as articles and symposia editor of the Stetson Law Review . She earned her bachelor of science, cum laude, in journalism from the University of Florida.
