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How Do Bankruptcy Exemptions Make the System Work?



By:Mike Cibik

QUESTION:   How Do Bankruptcy Exemptions Make the System Work?

When a bankruptcy is filed, the debtor can keep anything that is “exempt.” That always includes household goods and personal effects, and, most of the time, provides a homestead exemption that protects the debtor’s home. But why?

Actually, bankruptcy exemptions are absolutely necessary to a fair and forgiving economic system.  If declaring bankruptcy meant losing everything, all we would accomplish would be to create a community of destitute, starving people who would have to live off of welfare or government aid unless we sentenced them to a Dickens’ debtor’s prison!

Further, studies show that the more liberal the bankruptcy exemptions, the greater the state’s economic growth.  States with generous exemptions, like Texas and Florida, attract more entrepreneurs and businesses.  The owners know that if their business should collapse, they can file bankruptcy and won’t become completely destitute.

Determining which set of exemptions to use, however, can be a little frustrating.    Under current law, you can use the exemptions of the state where you are domiciled; if you have lived there for 730 days (two years).  If not, you have to use the exemptions of the state you lived in for the 180 days before the last 730. And if there is no state that meets those criteria, then you use the exemptions of the state you lived in for the longest portion of that 180 day period.  Clear?

This is confusing at best, and to make matters worse, some states don’t allow you to use their exemptions unless you are a resident. In those cases, you can use the Federal exemptions. (These are laid out in the Bankruptcy Code at Section 522.)

Filing bankruptcy is traumatic enough without taking the chance that you could be giving up more property than you legally need to.  Find a competent bankruptcy attorney to help.

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