Friday, November 2, 2012

Homestead Exemption: Should I Claim?

So, you are in Florida, need to file bankruptcy, and your house is upside down.  Well, not literally; upside down means your house is worth less than what is owed on it.  In Florida, if you do not claim a homestead exemption in your bankruptcy, you are eligible for a $4,000 wild card exemption.  This means you will be able to keep $4,000 of property that would otherwise be property of the bankruptcy estate, and sold by the trustee (usually sold back to the debtor).

So, what is the problem?  The problem arises when you do not claim the household exemption, you expose your property to being administered by the Trustee.  That is, the trustee could sell your house.  Of course, if you claim the homestead exemption, the property is protected, though the creditor may continue to hold a secured lien.

In the past, the practice has been to simply not claim the homestead exemption when the home is upside down, thereby entitling the debtor to the wildcard exemption.  After all, the property has negative equity, and who would want to purchase property for more than what it is worth.  Also, the trustee could only administer the estate (sell the property) if there is money to distribute to unsecured creditors.

Well, there are some Trustees in Florida currently administering property that is upside down.  Apparently, the Trustees have found investors willing to pay a small sum to acquire parcels of real property.  The investors acquire property with a low monthly mortgage payment, with financing in place, and rent the property for enough to hopefully show a positive return on their investment.  This is happening despite the property be acquired blindly, that is, the investor has no idea how much money will need to be spent on the property in order to put it into rentable condition.

In the specific case I am thinking of, as of today, an investor may be acquiring property in one of my cases, only having to bring the electric up to code, and repairing the roof.  There may be, of course, unknown problem, such as termite damage, mold, and possible plumbing problems.  After all, this property is owned by a debtor that is filing bankruptcy.  They have not had money necessary to properly maintain the property.

It will be interesting to see if this trend continues as investors acquire these properties with increased risk.

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