RESEARCH Business Economy

FLEEING FROM DEBT
Bankruptcy loophole lets debtors keep mansions while others suffer

Mark Reutter, Business Editor
(217) 333-0568; mreutter@uiuc.edu

4/1/2001

CHAMPAIGN, Ill. -- Will Congress ever cap the homestead exemption?

As the bankruptcy bills passed by the House and Senate head to the House-Senate conference committee for final crafting, the most intriguing question to Charles J. Tabb, a University of Illinois bankruptcy expert, is how Congress will deal with an infamous loophole used by wealthy debtors.

The loophole allows residents of Florida, Iowa, Kansas, South Dakota and Texas to use their homes to shield unlimited amounts of money from creditors. "The House bill continues this exemption as long as the debtor has lived in the state and owned the house for two years before filing for bankruptcy," said Tabb, a professor in the UI College of Law. "The Senate bill places a house cap of $125,000 above which a debtor cannot shelter assets from creditors."

President George W. Bush supports an unlimited home exemption provision. Last December former President Bill Clinton vetoed a measure similar to the House bill, saying the unlimited exemption was a bonanza for the wealthy, while other provisions in the bill were too onerous for middle- and lower-income families.

The unlimited exemption has made Florida, in particular, a haven for celebrities walking away from their debts. O.J. Simpson fled to Florida, purchasing a multimillion-dollar house in Miami, after a California court ordered him to pay $33.5 million in damages for the wrongful death of his ex-wife Nicole Brown Simpson and her friend Ronald Goldman. None of the damages has been paid.

Actor Burt Reynolds retained his lavish Florida mansion while leaving behind debts of more than $10 million. Paul Bilzerian, a corporate raider convicted of securities fraud, now lives in a
37,000-square-foot mansion north of Tampa; filing for bankruptcy twice, Bilzerian has so far walked away from $300 million in personal debts. Former baseball Commissioner Bowie Kuhn became a Florida homeowner two weeks before his New York law firm declared bankruptcy.

What makes the homestead exemption "politically explosive," Tabb said, is that the same bankruptcy bills make it very difficult for low- and moderate-income families to free themselves from debt by eliminating the option of a Chapter 7 bankruptcy, which permits a person to discharge debt payments under court supervision.

"The centerpiece of both bills is requiring debtors who have the means to repay their debts to do so. While this sounds good in principle, most people file for personal bankruptcy not because they’re extravagant spenders, but because they have lost their jobs, have high medical bills or cannot collect support payments from their former husbands."

The greatest increase in bankruptcy cases in the 1990s involved single or divorced women raising children. Tabb is the author of "The Law of Bankruptcy" and is the former editor of the Bankruptcy Law Letter.