LEGAL GUIDE
Written by attorney Sean Sullivan Hanley | Jul 29, 2011

BANKRUPTCY: New "Residency" Requirements

Some prospective Bankruptcy debtors moved locals in response to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCA), which codified several new substantive and procedural rules that makes it more difficult for some would-be debtors to file for Chapter 7 Bankruptcy. One of the biggest hurdles faced by post-2005 Chapter 7 Bankruptcy filers is the need to take and pass the feared "Means Test" (see Bankruptcy Means Test for an overview and discussion of the "Means Test"). Simply put, the "Bankruptcy Means Test" reviews a debtor's financial position {relative to their household size in the state of debtor's residence (and county/region within that state)} to determine if the debtor qualifies for Chapter 7 Bankruptcy.

One of the other main substantive changes codified in the new bankruptcy laws concerns domicile or residency requirements. As is the case with the complex second step "Bankruptcy Means Test" calculation, debtors that have recently moved and are considering filing for bankruptcy should consult a qualified bankruptcy attorney at Hanley Law concerning issues associated with residency/domicile requirements as the new bankruptcy domicile requirements often press complex legal issues, which ultimately can have a dramatic impact on the overall outcome/benefits received by a bankruptcy debtor.

The major reason why domicile requirements can have dramatic impacts on a bankruptcy debtor centers on the difference in exemption systems (categories and amounts) allowed to debtors in each particular state. In a very basic sense, the exemption system (categories and amounts) allowable to a debtor determines, for the most part, the items of real and personal property that the debtor may retain after their bankruptcy case is closed. The state a debtor files for bankruptcy in can impact whether, for example, a debtor retains their home (states have varying "Homestead Exemptions" amounts and qualifications (see Homestead Law), car(s) (states have varying "Motor Vehicle" Exemption amounts), and other real and/or personal property. See "Case Example" below for an illustration of how the results of a debtor's bankruptcy case can be drastically different depending on what exemption system they debtor is able, or has to, apply.

Domicile Requirements - Effect on use of exemptions:

The basic rule is that debtors are allowed to use a state's exemptions if they have been domiciled in that state for at least two years before they file Bankruptcy. Analysis of one's "Domicile" itself is a matter of confusion and debate. Domicile has been defined as "the place where a man has his true and fixed and permanent home and principal establishment and to which whenever he is absent he has the intention of returning". This implies something more than one's residence, which generally means where a person happens to be living at any given time.

One's domicile is the place, for example, where the debtor:

Is living and intends to live for the indefinite future,

Receives mail,

Votes,

Works,

Does banking,

Pays taxes,

Registers their car,

Participates in public affairs,

Owns property,

Applies for driver's license and

Sends their children to school, etc.

It is important to note that one's domicile might be different from the state where they are actually living. For example, members and family of the military, professional athletes, musicians, artists, and corporate officers might all spend significant time working or "playing" in another state, country, region, etc. In very simple terms, one's domicile is the state and county where one makes their permanent home.

If a debtor has not been domiciled in their current state for at least two years prior to filing, they must use the exemptions of the state where they were living ("...used to reside...") for the better part of the 180 day period ending two years before the debtor's filing date. Also, it is important to note that some states (like Rhode Island – See Case Example below) allow debtors to choose between their state exemptions or the federal exemptions and when this is the case, a debtor can use the federal exemptions regardless of how long they have been living in the state. The incorporation of these new strictly construed domicile requirements is another way for the court to hinder abuse of the bankruptcy system by debtors moving to states with more liberal exemptions simply to file for bankruptcy.

While the reason why a debtor may wish to move to a state that has the most advantageous exemptions for their particular factual situation is clear (i.e. debtor gets to keep more real and personal property), what is unclear is how the domicile requirement rule is applied as the verbiage of the rule read alone is extremely difficult to understand. The following is an example of an application of the new domicile requirement(s) for bankruptcy filers.

Debbie Debtor files bankruptcy in Texas on January 1, 2007. Debbie has not lived in Texas for two years (she just moved to Texas on November 17, 2006). Debbie will have to use the exemptions available in the state where she lived for most of the period between July 1, 2004 and December 31, 2004 ("...where Debbie used to reside for the better part of the 180 day period ending two years before the debtor's filing date...").

Debbie has a nomadic personality and has moved six times over the last several years. During the time period from July 1, 2004, to December 31, 2004, Debbie lived in two states, California and Arizona. Debbie lived in California from May 2004 to July 4, 2004, at which point, Debbie moved to Arizona and lived there from July 4, 2004, to January 5, 2005. Since Debbie lived in Arizona for the better part of the 180 day period ending two years before Debbie filed for bankruptcy, Debbie will have to use Arizona state exemptions. As a side note, Debbie does not have the option to use the federal exemptions as Arizona does not offer bankruptcy filers the option of choosing the federal exemptions as an alternative to its own state's exemptions.

As you can see, application of the domicile rules are complex and sometimes arguable; thus, if you are considering filing for bankruptcy, it is important to consult a Hanley Law attorney if you have moved or plan to move in the future.

Homestead Exemption - Special rule regarding domicile:

It is important to note, that a longer domicile requirement applies to homestead exemptions. If a debtor acquired a home in their current state within 40 months before they file for Bankruptcy(and the debtor did not purchase the home with the proceeds from selling another home in that state), the homestead exemption will be subject to a cap of $136,875. even if the state homestead exemption available to the debtor is larger.

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