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Closing the Homestead Exemption Loop Hole in Bankruptcy - U.S. Senate and House Bankruptcy Conferees Reach Agreement on Changes to the Homestead Exemption Provision

by Alan P. Fox, Esq.

Senate and House bankruptcy conferees are working on a report to send to President Bush on the hotly debated homestead exemption loop hole. This will become a first-ever agreement in more than five years of the debate on changes to that section of the U.S. Bankruptcy Code. The sole issue standing between the legislation and its enactment concerns the question of whether perpetrators of abortion clinic violence should be able to discharge judgments against them in bankruptcy.

Under the existing homestead exemption provisions, debtors in Texas, Florida, Kansas, Iowa and South Dakota can shield an unlimited amount of home equity from creditors by filing for bankruptcy protection and then have those savings declared off-limits for creditors. The remaining states have capped the homestead exemption for debtors filing for bankruptcy.

The American Bankruptcy Institute reports under the bankruptcy conferees agreement, which was a combination of amendments between Sen. Herb Kohl (D-Wis.) and Rep. Sensenbrenner, in order to be eligible for that state's unlimited homestead exemption, an individual must own a residence in a state for at least 40 months before declaring bankruptcy. If unable to meet the residency requirement, the debtor would be allowed to take only a $125,000 homestead exemption. The new language applies only in states whose homestead cap already exceeds $125,000. The changes would bar individuals convicted of felonies or securities crimes in the past 10 years from having access to the unlimited homestead exemption. The bankruptcy court would be required to find a link between the debtor's crime and the declaration of bankruptcy.