Cite as: Keith M. Lundin, Lundin On Chapter 13, § 48.6, at ¶ ____, LundinOnChapter13.com (last visited __________).
Prior to BAPCPA, it was easy to determine what state exemption law applied to an individual debtor in a bankruptcy case: the state in which the debtor’s domicile was located for the greater portion of the 180 days before the petition.1 BAPCPA applies instead the law of the state in which the debtor’s domicile has been located “for the 730 days immediately preceding the date of the filing of the petition.”2 If the debtor’s domicile has not been one state for that entire 730-day period, then exemptions are determined by the state “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.”3
In translation, the state law that determines exemptions in a Chapter 13 case will be the state of the debtor’s domicile at the petition if the debtor has been continuously domiciled in only that state for at least 730 days (two years). If the debtor established a domicile in more than one state during the two years before the petition, then exemptions are determined by the law of the state in which the debtor was domiciled for the longest period of time between 730 and 910 days before the petition.
The implications of this change in the domicile rules are great for consumer bankruptcy practice. Consumer debtors move a lot. When they move, they often intend to establish a new domicile—state of residence and domicile typically coincide and change as the debtor moves. Consumer debtors’ attorneys usually learn only the exemption laws for the state(s) in which they regularly file bankruptcy petitions.
After BAPCPA, counsel must prompt debtors to sketch a history of where they have lived during the past two and one-half years (approximately 910 days). Official Form 7 has been modified to require the debtor to list all places occupied during the three years before commencement of the bankruptcy case.4 This won’t be easy for many Chapter 13 debtors. There will be debtors who have lived many places—members of the armed services, construction workers and the like. Distinguishing the concepts of “domicile” and “residence” in this context will be a challenge. Domicile measures the debtor’s intent to make a permanent residence.5 The new domicile rule imposed by BAPCPA will test the boundaries of both concepts.
If debtors can remember all the places they lived during the two years before the petition, and if more than one state of domicile emerges during that 730 days, counsel has to identify the state that was the debtor’s domicile for the longest part of the period between 730 and 910 days before the petition. This calls for mathematical precision that is not consistent with reality. The outcome of this selection process could be very significant for the debtor because of differences in state exemption laws.
You have already tumbled to the realization that exemption laws for states all over the country will be relevant after BAPCPA in routine consumer bankruptcy practice. Attorneys comfortable with their knowledge of “local” exemption law will have to gather sources of information and become familiar with exemption laws in many or all states. And when you start digging, all sorts of interesting stuff will unearth.
Consider, for example, the Chapter 13 debtor in In re Battle,6 who resided in Texas at the petition but had lived in more than one state during the 730 days preceding. On careful analysis, it turned out that the debtor was domiciled in Florida for the greater part of the 180 days prior to 730 days before the petition and Florida law controlled exemptions.
When the Texas bankruptcy court took a good look at Florida exemption law, it found that Florida was an opt-out state in which federal exemptions were not available with respect to “residents of Florida.” This debtor was a resident of Texas bound by Florida exemption law only because of the domiciliary selection rule in § 522(b)(3)(A). Applying Florida law, the Texas debtor became eligible to claim federal exemptions:
Although BAPCPA mandates the application of Florida law for purposes of ruling on the Debtor’s exemptions, it is that law as applied to the facts as of the commencement of the case that ultimately determines which exemptions the Debtor may claim. On the date that the Debtor filed her bankruptcy petition, she did not live in Florida; she lived in Texas. She was therefore not a Florida resident on the filing date. The Florida opt-out statute, itself made applicable to this Debtor by sections 522(b)(2) and 522(b)(3)(A), states that “residents of this state shall not be entitled to the federal exemptions.”. . . By its own terms, therefore, the opt-out applies only to Florida residents. Because this Debtor was not a resident of Florida on the filing date, the Florida opt-out statute does not bar this Debtor from claiming federal exemptions.7
Battle illustrates that debtor’s counsel has to look carefully at the exemption laws of the state to which the debtor is pointed by the new domicile rule in § 522(b)(3)(A). Strange outcomes are likely because the debtor is resident and perhaps domiciled in the state in which the bankruptcy petition is filed but state law in another state will control exemptions using the same words—residence or domicile—to determine various aspects of state exemption law. The results can be intriguing as the bankruptcy court concluded in Battle—a debtor resident in an opt-out state could claim federal exemptions because the domicile rule applied the law of a different opt-out state in which the debtor was not resident. The outcome will be good news, bad news or no news depending on whether the federal exemptions are more or less generous than the state exemptions lost or gained by the domicile rule.
There is some exemption planning potential in this new domicile scheme that should be analyzed in each Chapter 13 case. If the debtor has been continuously domiciled in one state for two years but was domiciled in a different state for the greater part of the 180 days between 730 and 910 days before the petition will be filed, counsel should compare the exemption laws in the implicated states. The debtor should at least be informed when a change in domicile before filing a bankruptcy petition would trigger the availability of more favorable exemptions. The logistics of this sort of prepetition planning are problematic for most consumer debts, but the analysis should be undertaken to fully inform the debtor before filing.
With infuriating regularity, the drafters of BAPCPA added important new provisions to the Bankruptcy Code in “hanging” sentences and paragraphs that are not connected to any numbered or lettered section or subsection.8 There is an amazing hanging sentence at the end of § 522(b)(3) that promotes the new domicile counting rule to front-row interest for consumer bankruptcy practitioners:
If the effect of the domiciliary requirement under [11 U.S.C. § 522(b)(3)(A)] is to render the debtor ineligible for any exemption, the debtor may elect to exempt property that is specified under [11 U.S.C. § 522(d)].9
The cross-reference to § 522(d) pulls in the list of exempt property available to debtors in states that have not opted out of the federal exemptions. By comparison to state exemption laws, the federal exemptions in § 522(d) are more generous than many and less generous than some. The hanging sentence quoted above says that if the new domicile rule renders the debtor ineligible for “any exemption,” then the debtor may claim federal exemptions under § 522(d).
This is a significant abandonment of the “opt-out” compromise hammered out in 1978. Without regard to the choices by state legislatures to preclude use of federal exemptions, the new hanging sentence reinvigorates federal exemptions whenever the new domiciliary requirement renders the debtor ineligible for any exemption.
What does “any exemption” mean in this context? The drafters couldn’t have picked more ambiguous words to describe the undoing of a quarter century of bankruptcy law. “Any” can mean “one,” or “some” or “every” depending on context.10 There is nothing about the context of the hanging sentence at the end of § 522(b) to reveal whether “any exemption” means “any one exemption” or “every exemption.”
The outcome of this word parsing will be fundamental to determining exemptions for many Chapter 13 debtors who have moved and are now domiciled in a different state than the state that will control exemptions under the new domicile rule in § 522(b)(3)(A). A simple hypothetical makes the point.
Imagine a debtor now domiciled in Virginia who moved often with changing military assignments. The debtor was domiciled in Tennessee for the greater portion of the 180 days between 730 and 910 days before the petition was filed in a Virginia bankruptcy court. Under § 522(b)(3)(A), Tennessee law determines exemptions.
This hypothetical debtor now owns a home in Virginia. Can the debtor claim a homestead exemption under Tennessee law with respect to real property in Virginia? The “extraterritorial” effect of Tennessee homestead exemption law will be determined by Tennessee statutes and court decisions.11
Assume there is no extraterritorial effect of the homestead exemption under Tennessee law. The debtor cannot claim a homestead exemption in the Virginia real property. Has this debtor been rendered ineligible for “any exemption”? Can the debtor now use federal exemptions under the hanging sentence in § 522(b) notwithstanding that Tennessee opted out of the federal exemptions? Does it matter whether Tennessee law allows a debtor to claim exemptions in some kinds of property (for example, a bass boat) without regard to where the property is physically located? Does the debtor get all of the federal exemptions in § 522(d) or just the ones that have no analogue under Tennessee exemption law? Can the debtor cherry pick the most favorable provisions of Tennessee exemption law that are available to a debtor domiciled in Virginia and the most favorable provisions of the federal exemptions in § 522(d) with respect to other exemptions?
The extraterritorial effect of exemptions under state law is a complex subject that has not been thoroughly addressed by the appellate courts in every state. Legal research in this area will be complicated, and inconsistent outcomes are likely.12
There are hefty arguments from statutory construction that “any” in the hanging sentence in § 522(b) cannot mean “every.” The domiciliary requirement in § 522(b)(3)(A) can never render a debtor ineligible for all exemptions. There are exemptions allowed to individual debtors by the Bankruptcy Code itself that are not dependent on domicile selection under § 522(b)(3)(A).13 To give meaning to the sentence BAPCPA appended to § 522(b), “any exemption” must be specific to exemptions that are affected by a domicile choice—inevitably a subset of all exemptions.
The implications here for Chapter 13 practice are enormous. Any individual debtor who has moved in the two years before the petition and who must claim exemptions under the law of a state other than the current state of domicile is likely to find some provision of the exemption laws of that other state which apply only to property located in the state or apply only to citizens of that other state. A single such provision may trigger the debtor’s right to claim some or all of the federal exemptions under § 522(d). In states with meager exemptions, the opportunity to claim more generous federal exemptions is very attractive. Individual debtors involved in state court litigation or who face significant liability under state law will find a new incentive to file bankruptcy—not just to escape liability, but to pump up exempt property. Strategically, an involuntary bankruptcy case would disadvantage creditors in collecting from a debtor’s nonexempt assets if federal exemptions become available that are more generous than state exemptions.
Exemptions are not a sexy aspect of Chapter 13 practice—important but not sexy.14 Debtors sometimes use a Chapter 13 case to remain in possession of nonexempt property. And exemptions remain important in Chapter 13 cases to determine the minimum amount that must be paid to creditors under the best-interests-of-creditors test in § 1325(a)(4).15 After BAPCPA, Chapter 13 attorneys must slog through the new domicile rule in every case to determine the applicable state exemption law and then do the analysis described above to determine the most favorable exemption configuration.
It is hard to imagine that the drafters of BAPCPA intended the new domicile rule to have these broad effects in routine consumer cases.
1 11 U.S.C. § 522(b)(2)(A) (before amendment by BAPCPA). See § 49.1 [ Available and Important in Chapter 13 Cases ] § 48.1 Available and Important in Chapter 13 Cases.
2 11 U.S.C. § 522(b)(3)(A).
3 11 U.S.C. § 522(b)(3)(A).
4 See Official Form 7 (question 15), discussed in § 383.1 [ Statement of Financial Affairs after BAPCPA ] § 36.23 Statement of Financial Affairs after BAPCPA.
5 See § 49.1 [ Available and Important in Chapter 13 Cases ] § 48.1 Available and Important in Chapter 13 Cases.
6 No. 06-50454-C, 2006 WL 3702734 (Bankr. W.D. Tex. Dec. 12, 2006).
7 2006 WL 3702734, at *1.
8 See, e.g., the hanging sentence at the end of 11 U.S.C. § 1325(a), discussed in § 451.1 [ In General: Modification Without § 506 ] § 75.1 In General: Modification Without § 506, and the hanging sentence in 11 U.S.C. § 342(c)(2), discussed in § 365.1 [ Section 342: Notice in Chapter 13 Cases after BAPCPA ] § 4.3 Section 342: Notice What Didn’t Happen.
9 11 U.S.C. § 522(b).
10 See Webster’s New 20th Century Dictionary 83 (2d ed. 1983).
11 See William Brown, Lawrence Ahern & Donna Snow, The Extraterritorial Effect of Homestead Exemption Statutes: An Emerging Issue, 1 Norton Bankr. L. Adviser 2 (2006).
12 See, e.g., Drenttel v. Jensen-Carter (In re Drenttel), 403 F.3d 611 (8th Cir. 2005) (Debtors permitted to apply Minnesota law to exempt their Arizona homestead.); Arrol v. Broach (In re Arrol), 170 F.3d 934 (9th Cir. 1999) (California homestead law has extraterritorial effect.).
13 See, e.g., the new statutory exemption for retirement funds in 11 U.S.C. § 522(b)(3)(C), discussed in § 407.1 [ New Exemptions and New Exemption Limitations ] § 48.3 Exemptions and Exemption Limitations Added by BAPCPA.
14 See §§ 49.1 [ Available and Important in Chapter 13 Cases ] § 48.1 Available and Important in Chapter 13 Cases and 49.2 [ Timing and Procedure ] § 48.4 Timing and Procedure.