Written by attorney Pierre George Basmaji

A Recent Move Will Prevent You from Using Your Current State's Bankruptcy Exemptions

As a California-based bankruptcy attorney, my clients have it pretty good when it comes to property they are allowed to exempt in the bankruptcy process. For one thing, under one set of exemptions they may exempt $75,000 to $175,000 of their homestead (depending on their familial, retirement or disability status). Using the second set of exemptions, a debtor has up to a ~$23,000 "wild card" exemption which they may use towards any personal property (and this is on top of specific property exemptions, like the $3,525 vehicle exemption). Most people considering bankruptcy do not have anywhere near $23,000 in personal property. As a result, in California, most bankrupt petitioners can go through the bankruptcy process unscathed, retaining most of their property with little problem. The exemptions allowed under the Bankruptcy Code and many other states are not, however, as good as California's. The Bankruptcy Code exemptions are used by states who have not passed their own set of exemptions or by states who have passed their own but allow debtors to choose (California has explicitly forbids debtors from using the Bankruptcy Code exemptions). For example, the Bankruptcy Code only has a less than $12,000 "wild card" exemption (this is the maximum, it depends on the equity in your homestead). New York -- despite its high cost-of-living -- only has a $1,000 "wild card" and it may only be used if a debtor does not claim a homestead exemption but the state does have decent specific personal property exemptions (New York does also allow debtors to choose the Bankruptcy Code exemptions). Other states are even worse: I personally feel sorry for residents of Illinois -- who do not have the option to use the Bankruptcy Code exemptions -- which does not have a specific furniture/appliance/electronics exemption, a small vehicle exemption ($2,400), a tiny homestead exemption ($15,000) and only a $4,000 "wild card" exemption. Great, you are in California or in another state with favorable exemption laws. You sure do feel lucky about moving here last year and you are ready to take advantage of great exemptions. Hold on, cowboy! The Bankruptcy Code "reforms" of 2005 made it more difficult for debtors to "forum shop". There were complaints in the early 2000s of legitimate abuses of the bankruptcy process occurring; some rich debtors moved to debtors' havens such as Florida or Texas to take advantage of unlimited homestead exemptions or other favorable exemption laws. The abuses were very rare and the vast majority of debtors never considered "forum shopping" as a part of bankruptcy planning so, of course, Congress used a war-hammer to kill an ant: instead of focusing the law on rich debtors who were clearly abusing the process, Congress passed a law that made it impossible for anybody to use their state's exemptions even if they lived in that state for nearly two years. Under Section 522(b)(3)(A) of the Bankruptcy Code, you must have been domiciled continuously in your current state for 730 days before you file your bankruptcy petition to use your state's exemptions. If you were domiciled for just one day elsewhere during those 730 days, you use the exemptions of the state you spent most of your time of the 180 days immediately prior to the 730 day period (this could be just one day if, for example, you were domiciled abroad for 179 of those days). If you were not domiciled in any state during that 180 day period, you must use the Bankruptcy Code exemptions. It gets even more complicated. Some state's exemptions only apply to residents of the state, meaning an out-of-state debtor must use the Bankruptcy Code exemptions. There is a handy online guide at ExemptionsExpress to figure out this layer, however.

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