Credit and the Law: Do Floridas Exemption Laws Throw a Wrench in This Credit managers Personal Guarantee?

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Credit and the Law: Do Florida's Exemption Laws Throw a Wrench in This Credit manager's Personal Guarantee?

"I'm not here to turn people down," Ace Supply Credit Manager Pete Stacy told aspiring restauranteur Archie Fawn. "But there's no way I can help you. You've got no track record and almost no money, and you're looking for more than $100,000 in fixtures and equipment."

Editor's Note: This article originally appeared in the Credit & Collection Manager's Letter, which Credit Today purchased in 2006.

"But I've got a lease on the best location in town," the young man said hopefully. "And then there's my father-in-law. . ."

"Your father-in-law?"

"He's pretty well off, and he'd really like to see us make it."

"So he'll lend you the money?"

"No, but he said he'll sign a personal guarantee."

And that's how Fawn's Steakhouse got started. Ace supplied all of the fixtures and equipment for 10% down, and the balance was personnally guaranteed by Archie's father-in-law, a successful businessman, now retired.

The restaurant had a good first year and then faltered. Archie began missing some monthly payments, but thanks to the guarantee, Pete wasn't unduly concerned. Then one morning Ace's route driver reported that Fawn's Steakhouse was closed and stripped bare.

Where were the contents now? Pete didn't know or really care. He was more interested in the whereabouts of Archie's father-in-law. That afternoon he stopped by the office of Ace's attorney with the guarantee.

"This says this guy lives in Florida," the attorney said, reading the document.

"So?" said Pete.

"So we could have a real problem collecting on this."

What's the problem? Can Ace collect? Make your decision; then click on "next" below for the answer.

Florida's Exemption Laws: Not Always Friendly to Creditors

Ace Supply may be out of luck.

Florida's exemption laws make it the state considered most favorable to debtors. It is specifically the homestead exemption, which removes virtually all real property from the reach of any creditor, that makes the state so debtor favorable.

Key Definitions

Exemption Laws - These are the laws that define what cannot be touched by creditors.

Homestead exemption - This is the part of the exemption laws that defines what, exactly, a 'homestead' comprises. The homestead exemption is designed to protect the head of a household or a surviving spouse from losing their home to creditors.

The laws were originally enacted in America in the mid-19th century, in part to prevent insolvent debtors from becoming useless members of society.

In Florida, for example, the most liberal of all states, the exemption includes any person keeping a household of one-half acre within a municipality or 160 acres outside of a municipality.

Dating back to 1868 when the state constitution was enacted, the homestead exemption was originally restricted to heads of household, and there was considerable litigation revolving around the question of whether a particular debtor qualified as a household head. Then in 1985 the exemption was amended to apply to any person keeping a household of one-half acre within a municipality or 160 acres outside of a municipality.

This translates into the fact that any person may own a home of any value on 160 acres of land outside a municipality and said real estate and the home will be out of reach of any creditors (even if valued over a million dollars). Where separate residences are established in good faith by both husband and wife, it is conceivable that both parties may enjoy a homestead exemption under the Florida law.

Wages of a Florida resident are also exempt, as are bank accounts in which the wages are deposited.

So Florida has become something of a magnet for people seeking to avoid paying their debts, but many of them find that the homestead exemption is not available to them. Florida courts insist that the party's legal residence be in Florida in order to take advantage of the exemption, and the courts require some form of corroboration of the intent of the party. Merely stating what your intent is without substantiation may not be sufficient. Some of the things Florida will consider in determining a homestead exemption (in addition to the declaration of the party) are

where the party is employed.
where he or she is registered to vote.
the address on the driver's license.
the address on the federal income tax return.

Accordingly, people who merely visit Florida may be denied the benefits of the exemption.

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The party must also intend to utilize Florida as a residence on an ongoing basis. The mere fact that he or she is physically present in the state (without any intention of remaining there) will usually be insufficient. While this may appear to be subjective, the party must offer some evidence of the intention to continue to reside in Florida, at least in the foreseeable future. How long the foreseeable future should be is a question for the courts to consider.

The above analysis of the state of Florida may apply to a greater or lesser degree to the other states. In recent years changes in Texas laws have provided significant protection for debtors. In addition, there are several states (e.g., North Carolina, South Carolina, and Pennsylvania) where creditors are prohibited from garnishing the salaries of debtors. And, of course, there are homestead exemptions that vary from state to state across the country (for example, the exemption amount is $10,000 in the state of New York).

The lesson to be learned is not to abandon pursuing a debtor into what is known as a "debtor's state." Often the debtor will set up a residence in a debtor's state merely to discourage creditors and will maintain a residence elsewhere. When the debt involves significant monies, an investigation might be warranted to determine whether the debtor really does reside in Florida or Texas.

The investigation should start in the original state in which the debtor resided, and counsel should be retained to determine whether the debtor still has ties, both business and personal, to that state. If there are ties to that state sufficient to affect the exemption in Florida or Texas, then the option lies with the creditor to pursue the property and assets of the debtor in Florida and Texas as well as in the state where the debt was incurred.

Editor's Note: The above article originally appeared in the Credit & Collection Manager's Letter, a newsletter purchased by Credit Today in 2006. This article originally appeared prior to 2000.