John Stossel: Bankruptcy

July 5, 2001 -- Actor Burt Reynolds, who once joked about losing his Cadillacs in an ad for the Florida lottery, filed for bankruptcy in 1996.

He may have lost his Cadillacs, but Reynolds — who owed $9 million to credit card companies, the phone company, even the suppliers of his toupees — kept his million-dollar waterfront home.

Former U.S. Ambassador Marvin Warner, facing $100 million of debt , moved down to Florida and bought a million-dollar horse farm. Shortly after that, he filed for bankruptcy.

Sinking millions of dollars into homes and declaring bankruptcy — what's wrong with this picture?

The Homestead Exemption

If these people can't pay their debts, should they be allowed to keep their extravagant homes?

Sen. Sam Brownback of Kansas explains, "There's a sanctity about the issue of the homestead."

He's referring to the "homestead exemption," and in Florida, Iowa, Kansas, South Dakota and Texas, you can pour an unlimited amount of money into your residence, declare bankruptcy, and not worry about giving up your home to those you owe.

But was it really supposed to help someone like former Texas Gov. John Connally?

After some bad investments, he accrued $90 million in debts and had to file for personal bankruptcy. Under the law, he had to auction off almost all of his belongings, but he got to keep his 200-acre ranch.

Or what about corporate raider Paul Bilzerian? He owed millions and was jailed for securities fraud, but creditors got nowhere near his $5 million, 10-bedroom Florida estate, which has its own indoor basketball court and movie theater.

Now, only a small percentage of people filing for bankruptcy have big ranches or lavish estates, but creditors still lose out on millions because of the homestead exemption.

Congress is now considering a bill that would limit how much money you could shield from creditors by investing in an expensive home, but some politicians are saying the new law would hurt "the little people."

Florida Sen. Graham warns the bill "would threaten home ownership for millions of American families."

Texas Sen. Kay Bailey Hutchison asks, "Do you want to put a family out on the streets?"

Oh please. You could set a limit. They don't need houses that big. Give me a break.