Bush Opposes Limiting Texas Bankruptcy Shelter
By Dan Morgan
In Texas, a populist-minded state once settled by southern debtors who had lost their farms, the homestead exemption shields an individual's home from creditors in bankruptcy proceedings even if the home is a spread worth millions of dollars.
But a study released by Congress's General Accounting Office today may make that long-standing shelter a little harder to defend, critics say.
The study, based on an analysis of about 30,000 bankruptcy cases in two federal court districts in Texas and Florida, found that a $100,000 limitation on the home equity that could be protected a reform pushed by several senators would affect only a handful of relatively wealthy people. The findings suggest to some that the unlimited homestead exemption isn't the populist shield it has often been cracked up to be, but rather a convenient protection for a few affluent people.
Of the approximately 14,000 Chapter 7 bankruptcy cases closed in the Northern District of Texas in 1998, half involved a homestead exemption claim, GAO found. But only 83, or just over 1 percent, involved homestead exemptions for more than $100,000 in home equity. That is the ceiling proposed by Sen. Herb Kohl (D-Wis.), ranking Democrat on a Judiciary subcommittee, and Sen. Jeff Sessions (R-Ala.), who commissioned the GAO study.
"Although few would question that debtors deserve a roof over their heads, this exemption has been repeatedly abused," Kohl told a Senate hearing last year. He added that millionaire debtors move to states such as Texas and Florida and "continue to live like kings while their creditors get little or nothing."
Kohl based his indignation on spotty reports of wealthy individuals, such as movie actor Burt Reynolds and former baseball commissioner Bowie Kuhn, holding onto luxurious homes despite hundreds of thousands or millions of dollars in unpaid debts.
Although the GAO study found no cases as extreme as those, it estimated that, in the two districts studied, there were more than 150 cases in which debtors kept expensive homes while writing off over $50 million in debt.
An example unearthed by GAO was a Texas bankruptcy attorney living in a $386,000 home, with $1.5 million in debts. Under Texas law, creditors were unable to claim any of the value of his home, in which he had $146,000 of equity.
The unlimited homestead exemption exists in only three other states besides Texas and Florida: Kansas, South Dakota and Iowa. Most states allow only small exemptions. In Maryland and Virginia, debtors in bankruptcy proceedings can shield $5,500 and $6,500 in home equity, respectively, while in the District of Columbia, they cannot shield any home equity, according to the Bankruptcy Review Commission.
Lobbying by Texas politicians over the past several years has helped stave off a ceiling on the amount of exemption that states can allow.
Bush, GOP Lt. Gov. Rick Perry and Texas House Speaker Pete Laney, a Democrat, signed a letter to Congress last year opposing the limitation. They wrote that the ceiling would be a "clear violation of states' rights with regard to private property laws."
Other Texas Democrats, including Rep. Sheila Jackson Lee, have also opposed federal ceilings on the exemption. And the Texas state office in Washington, which is under Bush's direction, has lobbied against changes, sources said.
A Bush aide said last week that the homestead exemption was a state issue, not a campaign matter.
The House's 1998 bankruptcy reform bill went to the floor with a $100,000 limit, but it was struck from the bill during debate. Congress adjourned before acting on the legislation.
This year's House bill contains a $250,000 ceiling. But the measure was drastically watered down in the Judiciary Committee, which voted to allow state legislatures to exclude their states from the limit.
Texans also found allies in credit card company lobbyists who worked against a tough limitation on grounds that such a provision would turn Texas and Florida legislators against the bankruptcy bill and doom chances of reform.
But a new challenge may arise later this year when the Senate takes up its version of bankruptcy reform. Kohl and others have made clear that they will try to whittle away at the exemption,
Although the GAO study indicated that a cap would affect only a small number of people, it has taken on high political symbolism in the debate over bankruptcy reform. Critics of the House-passed bankruptcy legislation charge that it is heavily tilted toward creditors.
"This is the issue that exposes the cynicism" of congressional efforts to reform the bankruptcy laws, said Gary Klein of the National Consumer Law Center in Boston. "It's a loophole that's only available to debtors who are very well off. It creates a line between high- and low-income debtors."
© 1999 The Washington Post Company