This has been an exciting time for bankruptcy lawyers. Two, count ‘em, two, big Supreme Court decisions.
First, the United States Supreme Court settles a dispute over car allowances in a divided 8 – 1 opinion. In bankruptcy we have a “means test.” This test determines who can file for a dissolution and who enters a reorganization plan. A schedule is prepared with certain allowances are based upon published table of National and Local Standards as well as their actual expenses. The means test includes two car related deductions from income. Debtor’s may be eligible to deduct from income an allowance for car-operating costs and a separate allowance for car-ownership costs.
Jason Ransom owned a car, but he did not have any debt on it. He claimed that there were expenses associated with the ownership of the car, repair costs, maintenance, fuel and oil, which should be deducted from his income before determining what funds were available to repay debtors.
“Sorry,” said the Supreme Court. The, “Local Standard expense amount for transportation ‘Ownership Costs’ is not ‘applicable’ to a debtor who will not incur any such costs during his bankruptcy plan. Because the ‘Ownership Costs’ category covers only loan and lease payments and because Ransom owns his car free from any debt or obligation, he may not claim the allowance. In short, Ransom may not deduct loan or lease expenses when he does not have any.”
Justice Scalia took a contrary view, sticking up for the Debtor. Scalia?! “The reality is, to describe it in the Court’s own terms, that occasional overallowance (or, for that matter, under-allowance) ‘is the inevitable result of a standardized formula like the means test . . . . Congress chose to tolerate the occasional peculiarity that a brighter-line test produces.’”
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In the other big bankruptcy decision the Florida Supreme court determined if a Debtor who surrenders a homestead is entitled to the §222.25(4) Fla. Stat. (2010) personal property exemption of $4,000.00. There was considerable doubt in Florida if a debtor with a homestead, who was not claiming a homestead exemption, was entitled to a $4,000.00 deduction or limited to just $1,000.00. Florida’s constitution provides for extraordinary protection of the homestead.
We have to remember how powerful the constitutional homestead is. It protects the homestead against every type of claim and judgment except those specifically mentioned in the constitutional provision itself; (1) the payment of taxes and assessments thereon; (2) obligations contracted for the purchase, improvement or repair thereof; or (3) obligations contracted for house, field or other labor performed on the realty. No judgment is a lien on homestead said property; liens do not even exist! When a person acquires property and makes it his or her home, the property is impressed with the character of a homestead, and no action of the Legislature or declaration or other act on the owner’s part is required to make it the owner’s homestead, for it is already such in fact.
While bankruptcy is governed by federal law, states, as Florida did, may opt out of the federal bankruptcy exemptions. When a Florida resident files for bankruptcy, Florida law determines which property the debtor may exempt from the bankruptcy estate and administration by the trustee. Under Florida law the homestead exemption does not have to be claimed to be effective against creditors. This is what lead some bankrupcy court to find that the owner of a Florida homestead was limited to the $1,000.00 that is applicable to homestead owners and not the $4,000.00 those who do not have a homestead are limited to. Since you get the homestead, even if you don’t want it, you don’t get the $4,000.00 exemption.
But wait, what about the upside home; a $75,000.00 Port St. John residence with a $320,000.00 mortgage? When the underwater debtors surrender their homestead why should they lose $3,000.00 to their debtors when the renter next door excludes that same amount? “Good point,” say the Supremes. “To give full effect to the statute, we read the personal property exemption liberally and thus read narrowly the phrase restricting the availability of the statutory exemption to those who do not receive the benefits of the homestead exemption.”
“In summary, a debtor in a federal bankruptcy proceeding may cease to receive the constitutional protection from forced sale or levy by not claiming homestead property as exempt. Accordingly, if under the facts of the case the article X homestead exemption does not otherwise present an obstacle to the bankruptcy trustee’s administration of the estate, then the debtor in bankruptcy is not receiving the benefits of the homestead exemption and is eligible to claim the statutory personal property exemption of section 222.25(4).”
What does this mean? If you are losing the homestead, you get to exempt $4,000.00 worth of stuff. If you are keeping the house, your exempted property is $1,000.00.
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Judge Rainwater caught a reversal in a case involving a glass staircase. The trial court limited evidence in a case of an ambiguous contract, then entered an “internally inconsistent” judgment. Judgment: reversed.
See you next week.