The New Two Year Exemption Rule

There is an important new exemption rule applicable to people who have not lived in the same state for the two years before a bankruptcy. This new provision was enacted because Congress believed that some people were moving to states with certain unlimited exemptions (such as Florida with its unlimited homestead exemption) and funneling what would otherwise have been nonexempt property into a form protected by a generous exemption. So the new rule provides that the exemption law available to a debtor who has not lived in the same state for the two years before their bankruptcy is that of the state in which they lived for the greater part of the 180 days prior to the two year look-back period. This provision is found in the new Section 522(b)(3) of the Bankruptcy Code. In many states (Massachusetts for example) people in bankruptcy have a choice between the federal and state exemptions. However, as the Bankruptcy Code allows, some states have opted out of the federal exemptions. In these states only the state exemptions (and those exemptions under federal non-bankruptcy law — but we don’t need to get into that now) are available. The new exemption rule not only makes the exemption law of a previous state applicable in the circumstances I’ve described here, but also any opt out provision of that state. See 11 U.S.C. 522(b)(2). The bottom line is that if you have not lived in the same state for the past two years and are considering bankruptcy, please let your lawyer know. In almost all cases these issues can be resolved satisfactorily with professional advanced planning. Click here to read an example involving a Massachusetts bankruptcy.