Case Example - Outcome and benefits received by bankruptcy debtor differ depending on what state the debtor files bankruptcy in and whether debtor has option to use federal exemption system:
Benny Bankruptcy lives in Providence, Rhode Island, from July 1, 2006 to January 1, 2008. Benny has a gambling problem and spends almost his entire already minimal income at the local casinos betting on horse races. Benny gets an inheritance of $50,000. from his late mother on January 5, 2008, at which point, Benny decides to move to Alabama to get far away from the gambling scene and enjoy his new riches in the beautiful southern countryside.
While in Alabama, Benny buys a fully loaded ‘08 BMW for $15,000. Unfortunately, Benny spends too much too fast and by April 2009, Benny has accumulated $70,000. in credit card debt and his only remaining assets are $3,000. cash and the BMW, which, by Benny's filing date in April 2009, has a Kelly's Blue Book value of $10,000. Benny cannot keep up on his credit card payments and is at least six months delinquent on all 5 of his credit cards.
Benny wants to get rid of the $70,000. credit card debt, but Benny also desperately wants to keep his prized BMW, and, hopefully, his remaining cash. With no other reasonable alternative, Benny files for Chapter 7 Bankruptcy in April 2009 while living in Alabama.
Filing for Chapter 7 Bankruptcy (regardless of what exemption system Benny must ultimately use) will guarantee that all of Benny's unsecured debt (here, credit card debt) will be discharged at the termination of Benny's Chapter 7 Bankruptcy case. What is uncertain, however, is what property Benny will be able keep, which depends largely on the exemption system Benny is allowed to use.
Since Benny has only been living in Alabama for 15 months (not two years), Benny cannot use the Alabama exemption system. Instead, since Benny filed in April 2009, he must use the exemption system of the state where he lived for most of the six month period ending two years before he filed, or April 2007. Benny lived in Providence, Rhode Island for the six months prior to April 2007, so Benny must (see exception below, however, whereby some states, including Rhode Island, allow debtors to use the "federal exemption" system as an alternative to their state's exemption system) use the Rhode Island state exemption system, which has a "motor vehicle" exemption amount of $10,000. Thus, if Benny files Chapter 7 Bankruptcy using the exemptions provided for in Rhode Island, Benny's will be able to fully exempt his car from the bankruptcy estate; therefore, Benny will be able to keep his prized BMW after his bankruptcy case is closed. Rhode Island does not have a "wild card" exemption or any other exemption that will cover Benny's remaining cash, so Benny will pay $3,000. cash to the trustee to close his bankruptcy case (he had $3,000. in cash and $10,000. BMW when he filed for bankruptcy).
It is important to note that Rhode Island, like numerous other states (not all, though), gives filers the option of using either its state exemptions or the federal bankruptcy exemptions. Under the new law, the rules of the state where a person files determines whether the federal exemptions are available even if that person has not lived in the state long enough to use itsstate exemptions. This means that since Rhode Island allows debtors to choose between its state exemptions or the federal exemptions, Benny Bankruptcy can use the federal exemption system instead of the Rhode Island state exemption system. To determine what system to use, Benny's attorney would conduct a comparative analysis given Benny's goals and review the outcome of Benny's case if Benny filed for bankruptcy using the Rhode Island exemption system, or the federal exemption system.
The federal exemptions allow a $3,225. "Motor vehicle" exemption, which is clearly not enough to cover Benny's $10,000. car. However, the federal exemptions system also allows a "wild card" exemption of $1,075., plus $10,125. of unused "homestead exemption". Benny Bankruptcy does not own a home (he rents in Alabama), so Benny can use the $3,225. "motor vehicle" exemption, plus the $1,075. "wild card" exemption, and $5,700. of the total $10,125. remaining "homestead exemption" to exempt the entire value ($10,000.) of the BMW. Benny still has $4,425. of remaining "homestead exemption" (which, under the federal exemption system, can be applied to any property when debtor does not have homestead to protect); thus, Benny can also exempt the $3,000. of remaining cash from the bankruptcy estate.
Benny will use the Federal Exemption system as Benny will be able to exempt both of his assets ($10,000. BMW and $3,000. cash) from the bankruptcy estate using the federal exemption system, whereas Benny would lose his cash if he filed bankruptcy using the Rhode Island exemption system.
If Benny lived in Alabama for two years before filing for bankruptcy, Benny would use Alabama's state exemption system, which does not give bankruptcy filers the option of using the federal exemption system. Under Alabama's exemption system, Benny would lose his car as Alabama does not have an exemption for motor vehicles. Alabama has a $3,000. "wild card" exemption, which Benny would apply to his remaining cash. So, if Benny filed in Alabama, he would be able to keep the $3,000. cash, but he would lose his BMW.
As the example above illustrates, the exemption system applied to a particular bankruptcy case can have enormous impacts on the outcome and benefits received by a bankruptcy debtor. The bankruptcy attorneys at Hanley law can provide guidance as to "Domicile or Residency" requirements, as well as all other bankruptcy related questions.