Until July 1, 2007, the value of personal property a bankruptcy debtor was allowed to keep and tell their creditors to go jump off a bridge was really low, $1,000 per debtor and another $1,000 specifically for car equity, if any.

Compared to the rest of the nation, this was virtually nothing. Sure, there is the famous Florida Homestead Exemption which states that 100% of the primary residence is immune from creditors. Before the recent economic meltdown that total exemption exception for homes was really nice. But what about those poor folks who didn’t own homes? The apartment dwellers, roommates and folks who lived with relatives? How was it fair that someone could keep $250,000 in house equity but the apartment guy was limited to $2,000 between his stuff and his car?

Several good consumer bankruptcy lawyers, a law professor or two and some other folks put together some proposed legislation meant to help the folks who weren’t protecting house equity and got it passed by theFlorida legislature in 2007. The law that we Florida bankruptcy folk now refer to as the “wildcard” became effective July 1, 2007 and allowed an additional $4,000 per debtor (so $8K possible total for marrieds filing a joint bankruptcy petition) for those not getting a benefit from the Florida Constitutional Homestead Exemption. I highlighted that last sentence because we are going to come back to that language in a little bit.

About six months later, we had the big housing bubble burst. Florida residents are very familiar with this event. Most all homeowners found that their equity was evaporating and many people have ended up “upside down” in their homes since their homes were now worth less than what they owed to mortgages on their homes. This is still true today. So when people filed bankruptcy in Florida and their home equity was gone, their attorneys would not exempt the home equity (since there was none to exempt) and would claim the wildcard for their clients and at least try to protect the family car or the annual tax refund.

The bankruptcy trustees objected since the debtors were continuing to occupy and maintain their homes, resulting in a series of decisions from the several bankruptcy judges across the state that crossed the spectrum between allowing and completely disallowing the practice. Here in Orlando, the rule became that you could not claim wildcard if you intended to keep the home out of foreclosure and continue to live there, regardless of the home’s equity status.

Because of the conflict between the districts in the state, the Federal Court sent a request to the Florida Supreme Court to define the appropriate application of the wildcard statute when a debtor is retaining a Florida home. The question was something along the lines of “What does not getting a benefit from the FloridaConstitutional Homestead Exemption mean in the context of applying it to bankruptcy debtors?” This was in 2008. In the meantime, until we got our answer, we used the rules and decisions we had.

Fast forward to February 3, 2011. The Florida Supreme Court published its opinion Osbourne v. Dumoulin. The opinion is 25 pages long, but the end result is this: The “benefit” is the protection of equity from creditors, and if there is no equity to protect, then Florida homeowners may claim the wildcard. This decision is significant and will impact consumer bankruptcy practice in Florida until our housing value issue recovers.