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Web posted and Copyright © May 1, 2002, American Bankruptcy Institute.

Kohl Letter Urges Colleagues to Keep Homestead Cap

April 9, 2002

Dear Colleague:

The bankruptcy conference may soon meet again to resolve the outstanding differences between the House and Senate versions of the bill. One of those remaining differences involves the Senate provision that addresses the single most offensive abuse in the bankruptcy system, the homestead exemption. The homestead exemption allows debtors in five privileged states to declare bankruptcy but shield millions of dollars in their homes from their creditors.

The Enron collapse raises new concerns about wealthy former executives shielding their assets in luxury homes and then declaring bankruptcy. As the attached article from the New York Times discusses, several former Enron executives are selling numerous properties around the country, but retaining—or in some cases building—new luxury homes in Texas or Florida. These are two of the states with an unlimited homestead exemption.

Ken Lay, for example, is in the process of selling $20 million worth of property in Aspen, Colo., but intends to retain his $7.1 million, 13,000-square-foot condominium in the finest apartment building in Houston. Andrew Fastow's new multimillion-dollar home is currently under construction on a $1.1 million plot of land.

If the former Enron executives were to take advantage of this loophole in the law, they would not be alone in this legally sanctioned abuse. A U.S. General Accounting Office study of bankrupt debtors who take advantage of the homestead loophole in Florida and Texas found that each year more than 400 wealthy debtors are able to protect more than $100,000 in equity in their home at a cost to creditors of $120 million.

When the bankruptcy bill was debated in the Senate last year, 60 of our colleagues agreed that we needed to adopt a common-sense solution to this inequity: limit the homestead exemption to a maximum of $125,000 regardless of where the debtor lives. One of the central principles of the bankruptcy bill is that people who can pay part of their debts should be required to do so. In the spirit of compromise, we have raised the homestead cap to $175,000. And we remain open to effective and practical proposals aimed at solving this inequity.

I hope that you will join with me in closing the homestead exemption loophole.

Sen. Herb Kohl

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