You have been sued but you feel all snuggly and secure because your lawyer tells you that, no matter what, your home is safe. He tells you this because the equity in your house falls within your state’s exemption limits for homestead property.

In the words of a famous cinema icon....”Not so fast, there, pardner...”

Turns out your lawyer slept through his 10th grade History class. He missed the lecture about the principal of Federalism. Or maybe in his law school days, he was suffering a hangover during Constitutional Law, and has forgotten that Federal law preempts state law.

Either way, you might want to call the moving van.

Federal Laws preempt state laws

In October of 2005, Congress threw out the Bankruptcy Code and rang in the Bankruptcy Abuse Prevention and (Cruelty to the Poor??) Consumer Protection Act----BAPCPA, as it is known--—and everything you thought you knew about your “protected” assets may have gone the way of the dodo.

Let’s take my state- Florida- for example. Most debtors in Florida are told that no matter what, their home is safe from creditor attack. Florida, and four other states, have what is known as the “unlimited homestead exemption”. What is that? It’s law that says citizens of the state can not have their homes taken by a creditor no matter how much it is worth...it can’t be liened, can’t be levied against, can’t be attached. Sounds good, right?

But BAPCPA changed all that. The new Federal bankruptcy laws say the unlimited homestead exemption may not apply, and under the principal of Federalism, Federal laws preempt any contrary state law. “So what?”, you say. “I simply avoid filing for bankruptcy.”

Great idea....but what if someone forces you into bankruptcy?

Is that possible? Sure is....and it is known as “Involuntary Bankruptcy”. Anyone can file an action in bankruptcy court seeking to declare another person bankrupt...and it is not as rare as you might think. And with the enhanced powers vested in creditors under the new bankrutpcy code, Involuntary Bankuptcy (we’ll call it “IB”) may well become the new weapon of choice for pursuing creditors.

It only takes one

If you owe less than twelve creditors, it only takes one creditor to throw you into an IB. All they have to do is: 1) pay the filing fee 2) state that you are not paying a debt you owe, and 3) prove it. They do not even have to use a process server–the petition to throw you into IB can be served on you through the U.S. Mail!

If you don’t respond, you’ re toast. If you can’t prove the debt is bogus, you’re toast

Let’s take our scenario that opened this article. You are a Florida debtor and you think your home is safe. A creditor has rendered you involuntarily bankrupt. Your Florida homestead rights now give way to the new bankruptcy rules—and those rules can cost you your home.

Exemptions compromised by the IB

If you owned your home for less than 40 months, or only moved to your state within the last couple of years, or you stuffed any cash into the home...you face the prospect that the creditor may reach your home and take it from you.

Using IB, Creditors may also be able to reach other types of assets you thought were exempt. That is why the IB is increasingly becoming a weapon of choice for creditors...and why sophisticated asset protection is more important than ever before.

Final note: We will examine other risks related to the IB in a future article...look for “Beware the Involuntary Bankruptcy-- Part II” in the weeks ahead!