13 Mar Why Are Bankruptcy Exemptions So Complicated?
When youfile for bankruptcy, you get a certain amount of property that you can keep (“exempt“) and start over with. But if someonefilesand has more that that exempt / protected amount, then the non-exempt property can be sold to pay towards the debts owed.
Even if abankruptcydebtor 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 inChapter 7bankruptcy,or through a 3-5 yearChapter 13 payment plan.
Under the pre-2005bankruptcylaws, you used theexemptionsof 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 toclaim the exemptions of your new stateunless 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, thenwhat exemptions cover you are determined by a complicated formulabetween 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 withbetter exemptionsand get better treatment.
The idea that the law needed to change to preventdebtorsfrommoving to get a better exemption in bankruptcy is ridiculous in most cases. It certainly was not a commonoccurrence. I would go so far as saying that it was a rare event, especially when it came to thetypical 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 thatanother state’s property exemptionswere 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 ofenoughvalue to consider moving to protect, are also more likelyto be wealthierand theywon’t necessarily bedeterredby the two years. They may havehave the ability to plan for the two years it will take if they do want to move toprotect their assets. However, many already figured out ways to protect andshieldtheir 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.
On the other hand, if you are thinking about moving, you should see a lawyer before you go … just in case you are moving to a state with worse exemptions that the one you currently are in. (Read my article about why to see a lawyer before you move)
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