In a Chapter 7 or Chapter 13 bankruptcy case, debtors must make a full disclosure of all of their assets. Assets range from the tangible (furniture and appliances) to the intangible (stocks and intellectual property), from the valuable (real estate and vehicles) to the invaluable (clothing and timeshares), from the known to the contingent (tax refunds and personal injury claims), and include future, partial, and equitable interests.
Assets, particularly in Chapter 7, can be seized by a trustee and sold for the benefit of unsecured creditors unless the asset’s full value can be taken as exempt. Each state has its own respective property exemption laws (and the federal bankruptcy code also provides for its own exemptions). But you can only select one exemption set. Which one should you choose? Which ones can you choose?
It probably won’t come as much of a surprise that you can’t use California exemptions if you do not currently reside in California, nor have you resided there at any time in the past.
What might surprise you is that you can be a legal resident of California and not be eligible to claim its exemptions.
Let’s take a look at and parse the controlling rule, 11 U.S.C. § 522(b)(3)(A).
Property listed in this paragraph is […] any property that is exempt under Federal law, other than subsection (d) of this section, or State or local law that is applicable on the date of the filing of the petition to the place in which the debtor’s domicile has been located for the 730 days immediately preceding the date of the filing of the petition or if the debtor’s domicile has not been located in a single State for such 730-day period, the place in which the debtor’s domicile was located for 180 days immediately preceding the 730-day period or for a longer portion of such 180-day period than in any other place;
Quite a mouthful, eh?
Scenario #1. For simplicity’s sake, 730 days is two [non-leap] years. So, what this statute is saying is that – the state whose exemptions control is the state that the debtor has resided in for two years. So, let’s start with a simple example. John Doe is a resident of Wisconsin. Today’s date is May 29, 2013. John moved to Wisconsin from Rhode Island in 2006. Therefore, John Doe has been a resident of Wisconsin for more than two years. Therefore, John is entitled to use Wisconsin’s exemptions.
Before we continue any further, I should mention that Wisconsin is one of a few states that allows its qualifying residents to elect to choose Wisconsin’s state exemptions or the federal exemptions. As a practical matter, most attorneys use federal exemptions because the federal wildcard exemption protects certain assets like tax refunds that Wisconsin’s state exemptions do not. Wisconsin exemptions are favored when there is a lot of equity in a particular asset (such as a homestead) where the state exemptions are much more favorable than the federal exemptions.
Scenario #2. So, let’s change the facts around a little bit. Let’s say John Doe moved to Wisconsin from Rhode Island on June 12, 2012. Let’s further assume that John Doe began living in Rhode Island since 2003. John has had two residences in the past 730 days – Wisconsin and Rhode Island. Now, we have to look past the 2 year mark and look at the timeframe of 2.5 years ago to 2 years ago. During that time, John Doe was a resident of Rhode Island, which means Rhode Island exemption laws still control in John Doe’s case. In order to be eligible to use Wisconsin exemptions, John must wait to file his case until June 13, 2014.
Scenario #3. Now, let’s make it REALLY confusing. John Doe moved from Rhode Island to Wisconsin on June 12, 2012, and today is May 29, 2013. Prior to Rhode Island, John lived in Nebraska from 1999 to May 1, 2011. In the last 2 years, John lived in Wisconsin and Rhode Island. So, we shift our focus from the past 2 years, to the range of 2.5 years to 2 years ago. During that time, he lived in Nebraska and Rhode Island. Also during that time, he spent the majority of his time in Nebraska. Therefore, Nebraska exemptions control in this case.
In scenario #2, we are stuck with Rhode Island exemptions. Rhode Island allows nonresidents to claim its exemptions. Like Wisconsin, Rhode Island residents may also use federal exemptions. So, in this scenario, John Doe can choose between federal exemptions and Rhode Island state exemptions.
In scenario #3, we are stuck with Nebraska exemptions. Nebraska also allows nonresidents to claim its exemptions, but does not allow federal exemptions. Therefore, in this scenario, John would be limited to claiming Nebraska exemptions.
Other states, such as Arizona, do not allow nonresidents to claim its exemptions, but allow the use of federal exemptions. If Arizona was the controlling state, John Doe would have to use federal exemptions.
What about a state like Idaho, which does not allow nonresidents to use its state exemptions, but also forbids federal exemptions? In that case, the hanging paragraph in 11 U.S.C. § 522(b)(3) (just below subsection ‘C’) kicks in, and federal exemptions are available. This is also true if there is no controlling state (the debtor resided outside of the 50 states and D.C. in the qualifying time period).
If the effect of the domiciliary requirement under subparagraph (A) is to render the debtor ineligible for any exemption, the debtor may elect to exempt property that is specified under subsection (d).