BOCA RATON, Fla. – Executives and celebrities have long poured millions into magnificent estates in Florida and a few other states, knowing that if they file for bankruptcy their grand homes can't be touched.
But with the recent string of corporate scandals, some disgraced executives might not be able to take advantage of the provision much longer.
Tired of millionaires taking advantage of liberal bankruptcy laws, U.S. lawmakers are pursuing legislation to curb alleged abuses of the so-called homestead exemption. One provision would require a person to live in a home for 40 months to claim the exemption.
"The goal is if some famous person moves to Florida and buys a huge home, you can force them involuntarily into bankruptcy and they won't get to keep the house," said University of Florida law professor Jeffrey Davis.
Under the legislation, if someone like ousted WorldCom chief financial officer Scott Sullivan were to declare bankruptcy, he could not keep the lavish $15 million estate, complete with movie theater and six Jacuzzis, that he is building in Boca Raton. Sullivan was arrested last month on charges of falsifying the books by more than $3.8 billion; he used the home as collateral for his $10 million bail.
Florida, Texas, Iowa, Kansas and South Dakota have unlimited homestead exemptions that allow people who declare bankruptcy to keep their homes while creditors scramble to seize everything else.
Experts said the vast majority of the nearly 1.5 million people who file for personal bankruptcy each year have homes valued at less than $125,000. Attorney Stuart Young said new restrictions could hurt people who need protection, such as retirees who become overwhelmed with medical bills or college students who run up too much credit card debt.
Sen. Herb Kohl, D-Wis., who has been pushing for reforms, said that while people have been abusing the system for years, the Enron debacle has heightened the concerns. Authorities are trying to seize millions in assets from Enron executives.
Florida's rules were derived from its past as a Spanish possession and were designed about a century ago to lure people to its mosquito-infested, steamy climate.
"The concept was even if you owe debts, it wasn't responsible to make you homeless, so the family was protected even if the dad was a drunkard or a gambler," said G. Ray Warner, resident scholar at the American Bankruptcy Institute and a law professor at the University of Missouri.
With Florida's population booming, the rules long ago lost their original purpose.
Corporate raider Paul Bilzerian walked away from $300 million in debts while keeping a $5 million Florida mansion, despite a conviction on fraud charges and a 13-month prison sentence in the 1980s.
Actor Burt Reynolds declared bankruptcy in 1996, but creditors could not touch Valhalla, his $2.5 million estate in Hobe Sound. O.J. Simpson used the rules to exempt his home from the $33.5 million civil verdict against him over the slayings of his ex-wife and her friend.
Marvin Warner, a one-time ambassador to Switzerland, bought a Florida horse farm while seeking protection from $300 million in debt after his Ohio-based bank failed in 1985.
Other disgraced executives have homes in Florida and Texas but have not filed for bankruptcy. They include former Tyco International chief executive Dennis Kozlowski, who is accused of using a $19 million no-interest loan from his company to pay for his personal palace in Boca Raton.
Still, even if the laws are amended, experts said the wealthy will find ways to protect their assets.
"The sophisticated debtors are going to move it out of the country, to an account in the Caymans, for example, or hide it in some other way," Warner said.