Chapter 5: Exemptions
This chapter follows what may have appeared to be a pretty bleak picture for debtors
seeking bankruptcy protection. In the last chapter we learned that debtors must turn over to the
trustee all of their property, which becomes property of the estate, for liquidation. That picture is
not accurate, however, because an individual debtor is allowed to remove from the property of
the estate, and keep, any property that is exempt. 11 U.S.C. § 522(b)(1). Determining what
property is exempt is therefore extremely important to the individual Chapter 7 debtor.
While the statute suggests that the debtor recovers exempt property from the estate after
turning over all property, in practice the debtor simply does not turn over to the trustee the exempt
property. Instead, the debtor turns over to the trustee only that property which is not exempt.
Exemptions are not directly relevant to the reorganization chapters because an individual
debtor is allowed to keep all of his or her property in reorganization, regardless of whether the
property is exempt or not. However, the exemptions come into play indirectly in reorganization
cases as well, because the individual debtor must show that creditors will receive more in present
value under the reorganization plan than they would receive in Chapter 7 liquidation. Thus, the
reorganizing debtor does not have to “pay” out of future earnings for property that would be
exempt in Chapter 7.
Note that entity debtors, such as corporations and partnerships, are not entitled to
exemptions. 11 U.S.C. § 522(b)(1), emphasis added (“an individual debtor may exempt from
property of the estate . . .”). All property owned by corporate debtors becomes property of the
estate. A corporate debtor in Chapter 7 has no post-petition earnings that are separate from the
bankruptcy estate since the corporation is nothing more than the property it owns, and therefore
all corporate post-petition earnings must have grown out of the bankruptcy estate. See 11 U.S.C.
§ 541(a)(6) (property of the estate includes all post-petition earnings from property of the estate).
The corporate debtor after a Chapter 7 liquidation has been completed is an asset-less shell that
has no ability to continue in business. Chapter 7 is corporate death (although the process for
terminating the corporation’s legal status under state law should be followed). An individual
human debtor, however, lives on, keeping his or her exempt property and all post-petition earnings
from the individual debtor’s labor.
There are two separate exemption schemes recognized in bankruptcy: (1) a federal
exemption scheme in section 522(d) of the Bankruptcy Code, and (2) the applicable non-
bankruptcy exemption scheme in the debtor’s applicable state (which is used under state law to
prevent judgment creditors from levying the debtor’s exempt property), plus any non-bankruptcy
federal exemptions that are available to the debtor.
The Bankruptcy Code allows the debtor to elect to use either the Bankruptcy Code’s
exemptions, or the applicable state exemptions plus the non-bankruptcy federal exemptions, unless
the debtor’s applicable state as “opted out” – b y prohibiting its debtors from using the federal
bankruptcy exemptions. 11 U.S.C. § 522(b). In “opt out” states, the debtor must use the state
exemptions (together with non-bankruptcy federal exemptions).
The first step in analyzing exemptions is to determine which state’s exemption laws are
applicable to the debtor. In order to discourage debtors from moving between states in an attempt
to utilize more favorable exemptions, the Bankruptcy Code looks at two time periods in
determining which state’s exemption laws apply.
First, if a debtor has been domiciled (resided) in a single state continuously for the 730
days (2 years) before filing bankruptcy, the debtor will use that state’s exemption laws. 11 U.S.C.
Second, if the debtor has not been domiciled in a single state continuously for 730 (2 years)
before bankruptcy, then the applicable period is the 180 days (6 mos) before the 730 day period.
In that case, the question becomes “in what state was the debtor domiciled the most during the
180 day period.” Id.
5.2. Practice Problems: Which State’s Exemptions Apply?
Read 11 U.S.C. § 522(b)(3)(A), and answer the following questions:
Problem 1. Debtor was born and lived in Georgia for 50 years before deciding that he
needed to file bankruptcy. After visiting a local bankruptcy lawyer, debtor learned that the
exemption laws in the State of Florida are much more generous to him than the exemption laws in
the State of Georgia. On the advice of his attorney, debtor moved to Florida, waited two years and
two days, and then filed bankruptcy in Florida, claiming the Florida exemptions. Is he eligible for
the Florida exemptions?
Problem 2. Suppose that the debtor in Problem 1, after living in Florida for only 100 days,
received a good job offer in North Dakota, and decided to move. If the debtor wants to use Florida’s
exemptions (rather than Georgia’s or North Dakota’s), what is the shortest amount of time he
should wait after moving to North Dakota before filing his bankruptcy petition?
5.3. Electing the State or Federal Exemption Scheme
Debtors subject to the exemption laws of a state that has opted out by precluding its debtors
from electing the federal bankruptcy exemptions must use the state’s exemption scheme. 11 U.S.C.
§ 522(b)(1). About two thirds of the states have opted out (as of this writing, 19 states allow the
election between the state and federal exemptions).
The exemptions provided by state law vary greatly across the county. Some states have
extremely generous exemptions (such as Florida and Texas, allowing debtors to exempt an
unlimited amount of equity in a home), while others states are rather miserly (no homestead in
New Jersey and Pennsylvania). Most states exempt the basics: clothing, household goods, a few
thousand dollars of equity in a car, tools of the trade, and the like. State exemption statutes were
drafted primarily to protect the debtor’s necessary property from the claims of unsecured judgment
creditors. Both in and out of bankruptcy, exemptions do not protect against consensual liens. It
is the value of the property in excess of any consensual liens, the debtor’s equity in the property,
that is subject to exemption.
The federal bankruptcy exemptions are set forth in 11 U.S.C. § 522(d). Most debtors who
are allowed to elect, and do not have a lot of home equity, are better off using the federal