Usually you use the property exemptions available for the residents of your state. But not if you haven’t lived there long enough.
Property Exemptions in Chapter 7 Bankruptcy
In most consumer Chapter 7 “straight bankruptcy” cases you get to keep everything you own. That’s because everything you have fits within the property exemptions that are available for you to use.
To make sure that happens you need to:
- know what set of exemptions you are allowed to use
- apply the right exemption to each asset
- determine whether the dollar values of your assets fit within the maximum allowed values of the applicable exemptions
For example, if you own a guitar which has a fair market value of $500 you need to:
- know which set of exemptions are available to you as a residents of your state
- see whether that set of exemptions includes one specifically for musical instruments, or for some broader category such as “personal effects” which could include your guitar
- determine whether that exemption category fully covers your $500 value (including any other assets must also fit within that exemption category)
The rest of this blog post focuses on the first of these—using the right set of exemptions.
Using the Right Exemptions
Doing this takes two steps.
First step: there is a federal set of bankruptcy exemptions, and each state has its own set of exemptions. If you live in one of 19 states, you can use either that state’s exemptions or the federal ones. These 19 states are:
Alaska, Arkansas, Connecticut, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin.
If you live in any other state the federal exemptions are not available. You must use that state’s exemptions when you file bankruptcy.
Obviously, you’ll be in trouble if you try to use the federal exemptions if you live in any of the other 31 states, or if you use a different state’s exemptions. The trustee would object, and you’d have to change to the right set of exemptions. And then you might no longer be able to protect something of yours you thought you could.
Second step: you must qualify to use the exemptions available to those in the state where you live by living there long enough. The rule is generally simple enough. You can use the exemptions available in the state where you’ve been living if you’ve been there for two years.
More precisely, the Bankruptcy Code says it’s where your “domicile has been located for the 730 days immediately preceding the date of the filing of the petition.” (2 times 365 days = 730 days.) See Section 522(b)(3)(A).
And if you haven’t been living in the state for a full two years, then you use the exemptions for the state where your “domicile was located for 180 days immediately preceding the 730-day period.”
So let’s say you moved 18 month ago from Pennsylvania to Arizona, after living in Pennsylvania for 6 months, and before that in Massachusetts for 10 years.
Since you haven’t lived in Arizona for two full years, you can’t use the exemptions usually available there. You don’t use exemptions available in Pennsylvania either since you were living there during the last two years not right before. Massachusetts is where you were living during the 6 months just before two years, so you use the exemptions available there.
Massachusetts is one of the 21 states giving you a choice between the federal and state’s sets of exemptions. So you file your bankruptcy case where you are living in Arizona. But you use the exemptions available in the state you lived in two states ago. And that gives you the option of the Massachusetts and federal sets of exemptions
Two Quick Practicalities
One: This two-year rule could work to your advantage as well as possible disadvantage. If you’ve moved from a state with better exemptions for the assets you own, being required to use that prior state’s exemptions could protect your assets better.
Two: To the extent that you have the flexibility to speed up or delay your bankruptcy filing, you may want to time your filing to take advantage of the more favorable set of exemptions.