The Bankruptcy Reform and Consumer Protection Act which became effective on October 17, 2005 has been criticized for its lack of clear and concise language. One issue, concerning the limit of the value of homestead exemptions, has already been discussed in three conflicting opinions from Arizona and the Southern District of Florida.

Sections 522(p) and (q) provide that if a debtor elects to use state exemption laws rather than the federal exemptions, then the homestead exemption is limited to $125,000.00 if the homestead was acquired within 1,215 days prior to the petition date.

Section 522(p) reads in part “…as a result of electing under subsection (b)(3)(A) to exempt property under State or local law, a debtor may not exempt any amount of interest that was acquired by the debtor during the 1215-day period preceding the date of the filing of the petition that exceeds in the aggregate $125,000 in value…”. Clearly the language states that the $125,000.00 cap is effective only as a result of electing between state and federal exemptions. How does this apply to those states in which debtors cannot make an election? If a debtor is required to use state exemptions, there is no result of an election. Does this provision apply only in Texas and Minnesota, the only states in which a debtor can elect to use state or federal elections? This question was raised in In re Kaplan, 2005 Bankr. LEXIS 1948 (Bankr. S.D. FL. October 7, 2005), In re McNabb, 326 B.R. 785 (Bankr. D.AZ. 2005) and In re Wayrynen, 2005 Bankr. LEXIS 2041 (Bankr. S.D. FL October 14, 2005).

The McNabb court held that reading the phrase “as a result of electing” limits the $125,000 cap to Texas and Minnesota, the only two states where a debtor can make the election. The court says that if Congress had intended the limit to apply to all states, it would have simply omitted the phrase. The Court cites additional language in the new law which supports its decision that the confusing provision applies only to Texas and Minnesota.

The Kaplan court comes to a different conclusion. The Kaplan court states that the canons of statutory construction permit the court to consider legislative intent and says that the intent of Congress was that the homestead limit was intended to apply in all states, even those who have a mandatory opt-out of the federal exemptions. The Kaplan court discerns legislative intent by reviewing the House Report accompanying Senate Bill 256, which later became the new Bankruptcy laws. Language in the Report states that the bill would restrict the “mansion loophole,” or loopholes such as in Florida in which there was no homestead limit and mandatory opt-out of the federal exemptions. Further, the court states that nowhere in the Report is it mentioned that the provision was intended to apply only to Texas and Minnesota, the only states which would be effected under a strict reading of the provision.

The Kaplan court further states that it was common knowledge that Florida’s unlimited homestead was at the heart of the legislative debate. The Kaplan court held that the $125,000 limit applies to all homestead exemptions. Judge Mark, in the Kaplan opinion, writes that “This Court sincerely hopes that there will be uniformity amongst the Florida judges in finding, as this Court does with certainty, that the limitations in ? 522(p) and (q) apply to debtors claiming exemptions under Florida law.” This was not to be as another judge from the Southern District of Florida issued a contradictory opinion just one week later.

The Wayrynen court agreed with the McNabb court and held that the language of the statute was clear and held that the $125,000 homestead value limit does not apply to Florida homesteads. The court held that since Florida opted out of the federal exemptions, there can be no “result of electing” to trigger the homestead limit.

This issue is sure to be widely debated in the upcoming months. If Congress does not address the issue in the anticipated technical amendments to the Bankruptcy law, then the issue will likely rise to the Appellate level and possibly the Supreme Court.

Ray