Homestead exemptions addressed
A “bankruptcy bill” signed into law in April will make it harder for consumers to shield their assets and avoid paying off medical bills and other debt, according to some industry observers. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, much of which goes into effect Oct. 17, has provisions that affect corporations, small businesses, and farmers, as well as consumers. Although the bill was passed with the stated intent of increasing personal responsibility and integrity, opponents contend it could harm consumers with a legitimate need to declare bankruptcy.
Information about the aspect of the bill that concerns homestead exemptions has been circulating among access professionals, many of whom believe it will go a long way toward helping hospitals get paid, since a great percentage of bankruptcy filings are prompted by medical debt.
“Due to the tougher regulations surrounding the new bankruptcy law, more medical debt will be repaid rather than cleared by persons who might have filed under Chapter 7 in the past,” says Patti Daniel, CHAM, policy development/government relations chairwoman for the Washington, DC-based National Association of Healthcare Access Management.
However, the homestead provision has some limitations that greatly restrict the number of debtors who actually will be affected by it, notes Loren Ratner, an attorney specializing in health and hospital law in the Health Services Group of Nixon Peabody LLP in its Garden City, NY, office.
Law limits exemptions in some states
The law places new limits on the use of state homestead exemptions in bankruptcy filings, Ratner says, but she points out that only a handful of states have unlimited homestead exemptions (meaning an unlimited amount of equity in the debtor’s home is protected from creditors).
According to congressional reports related to the act, states with unlimited homestead exemptions include Florida, Iowa, Kansas, South Dakota, and Texas, plus the District of Columbia, Ratner explains. “Under the new law, a debtor may not claim a homestead exemption of more than $125,000 if the debtor purchased the home within 1,215 days (40 months) of his or her filing for bankruptcy,” she says. “In addition, the debtor cannot exempt more than $125,000 under a state homestead exemption if the debtor engaged in criminal conduct or violated securities law,” Ratner adds.
A debtor also is not allowed to use a state’s homestead exemption, she says, if he or she moved to that state within 10 years prior to filing bankruptcy to take advantage of the state’s more generous homestead exemption, in an attempt to hinder, delay, or defraud a creditor. “An example is where the debtor used the proceeds from the sale of securities to build equity in his or her home in order to shield from creditors the money received from the sale of securities,” Ratner explains. “In a nutshell, the changes do place some limits on the ability of debtors to shield the equity in their homes from creditors, but it is limited to those states in which debtors have unlimited homestead exemptions, and limited to certain circumstances, such as where the debtor purchased the home within 40 months prior to filing bankruptcy or engaged in certain illegal activity,” she adds.