Fla Supreme Court finds for Debtors in Mortgage / Wildcard Case

In Osbourne v. Dumoulin, __ Fla. ___ (February 3, 2011), the Florida Supreme Court held that debtors in bankruptcy who indicate an intent to surrender their homestead property do not "claim or receive" the benefit of the constitutional homestead exemption, and therefore, will generally be eligible to receive the statutory personal property exemption.  The Court found this result even where the debtor has no immediate plans to move out of the home. The issue was framed by the Court as follows:

Whether for the purpose of the statutory personal property exemption in section 222.25(4), a debtor in bankruptcy receives the benefits of Florida's article X, section 4, constitutional homestead exemption where the debtor owns homestead property but does not claim the homestead exemption in bankruptcy and the trustee's administration of the property is not otherwise impeded by the existence of the homestead exemption.

The Court answered: No.

However, the Court allowed that the "claim or receive" analysis was a factual one, and that cases must be decided on a case-by-case basis:

As several courts have explained, each case must be decided on its own facts because the debtor in bankruptcy may still receive the homestead examption's protections despite failing to assert the homestead exemption. In re Bennett, 395 B.R. at 790 ("A debtor who does not claim the Homestead Exemption may still receive its benefits in certain limited circumstances that can only be determined on a case-by-case basis, after a fact-intensive inquiry.").

By way of an example, the opinion cites In re Hernandez, 21 Fla. L. Weekly B299, B300 (Bankr. S.D. Fla. Apr. 10, 2008), for the proposition that a married debtor filing alone whose home remained exempt from forced sale pursuant to the homestead protection because his nonfiling spouse retained protected homestead status nevertheless received the benefit of the constitutional protection, and could not claim the statutory personal property exemption (the "wildcard").

The holding makes clear that if the trustee's ability to administer the property is not impeded or obstructed by the homestead exemption, the debtor may claim the additional $4,000 statutory personal property exemption:

[W]here a debtor in bankruptcy elects not to claim the article X, section 4, homestead exemption and the trustee's administration of the bankruptcy estate is not otherwise obstructed by the existence of the homestead exemption, the debtor does not receive the benefits of the homestead exemption and may claim the section 222.25(4) personal property exemption of $4000.

Finally, the fact that a debtor is eligible for homestead protection, or that any equity in the homestead may be subsumed by a mortgage does not affect the analysis of the trustee's ability to administer the estate:

[W]hether a debtor in bankruptcy could claim the homestead exemption, previously received the benefits of the homestead exemption, or may receive such protection after discharge from bankruptcy does not constitute receiving the benefits of the article X homestead exemption within the meaning of the personal property exemption.

Therefore, my evaluation is that this decision is favorable to debtors. If a debtor in an underwater mortgage declares an intent to surrender their homestead on their bankruptcy petition, and claims the $4,000 (or $8,000 for couples) additional wildcard exemption, the burden would seem to be on the objecting trustee to prove that factual circumstances exist that would "obstruct" the trustee's ability to administer the homestead property, even if there is no practical reason for the trustee to administer it (such as because it is fully secured).

Update 4-26-2011: Trustees are responding to this ruling by taking steps to force debtors to either move out or give back the wildcard exemption. For example, some trustees are requiring debtors who remain in their homes to pay rent to the estate, or turn over the keys to the property. At least one trustee that I am personally aware of has hired a real estate broker to try to short sell these properties.

You can download the full opinion here.