It is becoming well known that following the Florida Supreme Court case of Havoco v. Hill a debtor can use non-exempt cash otherwise subject to creditors to either purchase a homestead or reduce the principal balance of a mortgage on the debtor’s homestead without fear that the purchase or principal payment could later be reversed or undone pursuant to Florida’s fraudulent conveyance laws. Under the Florida Court’s decision it makes no difference when money is applied to the homestead to protect the money from creditors. But, does it make any difference if that same debtor files for bankruptcy liquidation under Chapter 7 within one year of the purchase or mortgage payment. Section 727 of the Bankruptcy Code says that a fraudulent transfer by a debtor within one year of bankruptcy is grounds to deny discharge, i.e., “kick the debtor out of bankruptcy.”
How do the penalties of the Bankruptcy Code interact with the homestead protections established under Florida state law. The Florida Supreme Court in Havoco v. Hill did not say that hiding non-exempt money in a homestead is not a fraudulent conveyance or fraudulent conversion; it said that the State’s constitutional homestead protections take precedence over remedies available under Florida’s fraudulent conveyance statutes.
The initial answer is that Havoco v. Hill will not protect a bankruptcy debtor’s fraudulent conversion to homestead. In the bankruptcy case of In re Chauncey the bankruptcy court denied a bankruptcy discharge to a debtor who paid substantial funds to his mortgage company three months of filing bankruptcy. Furthermore, the court sanctioned the debtor by placing an equitable lien on his homestead and permitting the trustee, or the creditors, to foreclose on the lien. In this case, the debtor who tried to use homestead protections to abuse the bankruptcy system lost the benefits of bankruptcy and possibly lost his house as well.
I checked with the debtor’s attorney and found that he appealed this decision to the Federal District Court of the Southern District of Florida. The ultimate ruling in this case is still to come.