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Uniform Bankruptcy Law? Your State Does Matter!

By Karen Oakes, Southern Oregon Bankruptcy Attorney

As explained by Professor Daniel Austin of the Northeastern University School of Law in Boston, Mass. in the December/January 2011 American Bankruptcy Institute Journal, the U. S. Constitution in Article 1,  the Bankruptcy Clause,  authorized Congress to establish uniform laws regarding bankruptcy throughout the United States.   However, as Prof. Austin acknowledges, the reality is far from uniform.  Each state has their own state laws which impact bankruptcy as well as variations on how the particular state’s bankruptcy courts or appellate courts interpret bankruptcy law.  Also, each federal district court has the ability to implement local rules which also affect how bankruptcies are administered.   And as each state has attempted to “interpret” the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 over the past five years, the states are even more divided on how bankruptcies are administered as explained by my colleague, Susanne Robicsek from North Carolina.

For example, states can elect to use the federal bankruptcy exemption laws or other non-bankruptcy exemptions available* or the state may elect to use the state’s bankruptcy exemption laws or non-bankruptcy exemption laws (or both).  In Oregon, for example, the state has elected not to use the federal bankruptcy exemptions, but instead to use the state’s non-bankruptcy exemption laws.   In Oregon, the homestead exemption was recently increased to $40,000 for a single debtor and $50,000 for married debtors filing a joint bankruptcy case, as recently discussed by Kent Anderson, my Oregon colleague.     However, in Florida and Arkansas, also states who have elected not to use the federal exemptions, the homestead exemption is unlimited.   In California, Cathy Moran, California bankruptcy attorney, explains the state has both bankruptcy and non-bankruptcy exemptions, with differing amounts available for a debtor (the debtor must choose one set of exemptions and use only the one set).  One set of the California exemptions  has a much higher homestead exemption if the debtor is 65 or older.

As further explained by Professor Austin, judicial interpretation can make a huge difference in how a bankruptcy case proceeds.   Some states have interpreted the 2005 Bankruptcy Act to mean that an “above median income” debtor who files a chapter 13 must file a 60-month plan, while others look at the results of the new form which calculates “disposable monthly income” and the decision of the plan length is purely based on the results of that calculation.

Due to the non-uniformity of the bankruptcy laws, Congress attempted to prevent a debtor from moving to a state with better exemptions with the passage of the Bankruptcy Abuse Prevention and  Consumer Protection Act of 2005.  That 2005 Act introduced a new requirement under 11 USC 522 for all debtors–that a debtor may not use the exemptions of the state in which they live, unless the debtor has resided in that state for 730 days, as explained by my colleague, Nicholas Ortiz.   While the new provision was designed to prevent abuse, I have found that in my practice, that this new provision has assisted debtors to keep property that they would lose under Oregon exemption law.    For example, in the last four years, I have had debtors keep a fully paid for home as they had to use California exemptions and were over age 65 while in Oregon, they would have been limited to $50,000.   Another debtor was able to retain over $20,000 in personal property under the federal exemptions that Oregon law would have required to be sold by the Trustee if it had been valued more than $400.

Professor Austin concludes his lengthy report by concluding there is nothing uniform about the uniform law.

* Examples of Federal Non-Bankruptcy Exemptions are: 

Retirement Benefits
5 USC. §8346 - Civil Service employees
22 USC. §4060 - Foreign service employees
10 USC. §1440 - Military service employees
45 USC.§.231m - Railroad workers
42 USC. §407 - Social Security benefits
38 USC.§3101 - Veteran's benefits
Survivor's Benefits
10 USC. §1450 - Military service.
28 USC. §376 - Judges, U.S. court directors, judicial center directors, and U.S. Supreme Court Chief Justice's administrative assistants.
33 USC. §775 - Lighthouse workers
Death and Disability Benefits
5 USC. §8130 - U.S. Government employees
33 USC. §916 - Longshoremen, harbor workers
42 USC. §1717 - Military service
Misc.
10 USC. §1035 - Military deposits to savings accounts (while on permanent duty outside the U.S.).
15 USC. §1673 - 75% of earned but unpaid wages or 30 times the federal minimum hourly wage; the greater of these two. (Judge may approve more)
25 USC. §410 - Indian lands or homestead sales or lease proceeds.
25 USC. §543 & 545 - Klamath Indians tribe benefits
38 USC. §1970(g) - Military group life insurance
45 USC. §352(e) - Railroad workers' unemployment
46 USC. §11110 - Seamen's clothing
46 USC. §11109 - Seamen's wages (while on a voyage and pursuant to a written contract)

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Full post as published by Credit Law Network on February 23, 2011 (boomark / email).