To recap:
1. I have tables with character and text type fields, in SQL server dataset, set to NOT allow NULL values and "" as the default.
2. Uploading data from VFP using SQLXMLBulkLoad produced an error when character/memo fields had an empty value.
3. Changing "KeepNulls" and "CheckConstraints" property did not make any difference.

After trial and errors, I found that when "true" is assigned to the "transaction" property this problem does not occur.
Here the code:

loBulkLoad = createobject('SQLXMLBulkLoad.SQLXMLBulkload.4.0')
loBulkLoad.Transaction = .t.
loBulkLoad.Execute(lcSchema, lcData)

>>Thank you Naomi
>>
>You're welcome, let us know what would be your solution.