Why Are Bankruptcy Exemptions So Complicated?

by Susanne Robicsek,

When you file for bankruptcy, you get a certain amount of property
that you can keep ("exempt") and start over with. But if someone
files and has more that that exempt / protected amount, then the
non-exempt property can be sold to pay towards the debts owed.

Even if a bankruptcy debtor has property over the protected allowance,
they may be able to keep it if they are able to pay the overage to the
creditors – either quickly in Chapter 7 bankruptcy, or through a 3-5
year Chapter 13 payment plan.

What you get to keep through bankruptcy is called exempt property, and
it is governed by exemption laws.

Under the pre-2005 bankruptcy laws, you used the exemptions of the
state you lived in when the case was filed, even if you hadn't lived
there long. Under the current laws, what you can keep depends on
where you live and how long you have lived there.

The bankruptcy law was changed in a major overhaul in 2005. One
change was made so that you aren't able to claim the exemptions of
your new state unless you have been there at least two years.

If your former state allows non-residents to claim their exemptions
then you might have to use your old state's laws, or if you might have
to use federal exemptions.

If you hadn't lived where your bankruptcy case is filed for at least
two years, then what exemptions cover you are determined by a
complicated formula between state laws and federal laws.

What is the purpose of this change? Well, presumably it is so that
people about to file for bankruptcy couldn't move to a state with
better exemptions and get better treatment.

The idea that the law needed to change to prevent debtors from moving
to get a better exemption in bankruptcy is ridiculous in most cases.
It certainly was not a common occurrence. I would go so far as saying
that it was a rare event, especially when it came to the typical
consumer debtor, and not a scenerio that I ran across as being top on
most people's list when juggling their debts.

By a typical consumer debtor, I mean regular people. People who would
not describe themselves as being wealthy, who work hard to make a
modest living and take care of their families, who may be middle class
but have to watch their money.

The truth of the matter is that few regular people would ever think of
moving because they are trying to keep property from creditors. Most
regular people aren't even aware of the differences between exemption
laws – would you?

Few consumer debtors filing Chapter 7 or Chapter 13 bankruptcy have
assets of value enough to even consider such a drastic measure.

And in many cases, all the debtors' property is protected, including
their homes. They wouldn't even need to move to keep everything.
Even if someone was aware that another state's property exemptions
were better, a move would require money – which most bankruptcy
debtors don't have! Not to mention having to leave their homes and
jobs behind. This just isn't the type of hardship most debtors and
their families would do.

The irony is that those who would have assets of enough value to
consider moving to protect, are also more likely to be wealthier and
they won't necessarily be deterred by the two years. They may have
have the ability to plan for the two years it will take if they do
want to move to protect their assets. However, many already figured
out ways to protect and shield their property from creditors.

But the bottom line is that for many people filing for bankruptcy, you
won't need to think about moving to protect your property. If you are
in financial trouble, go see a good lawyer to discuss bankruptcy and
what you can keep in your state.

For more information on these matters please call our office at 305
548 5020, option 1.

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