Academic journal article Brigham Young University Law Review

A Fresh Start to Bankruptcy Exemptions

Academic journal article Brigham Young University Law Review

A Fresh Start to Bankruptcy Exemptions

Article excerpt


Exemptions play a prominent role in bankruptcy1 by determining what property a debtor can keep. Traditionally creatures of state law, exemptions prevent unsecured creditors from seizing or forcing the sale of a debtor's property. In bankruptcy, exemptions operate in the same way by determining the types and amounts of property that can or cannot be sold by the trustee. In typical Chapter 7 cases, the trustee liquidates a debtor's interest in unencumbered non-exempt assets.2 What is left over, the debtor retains.

Property exemptions implicate a strong federal interest when a debtor files bankruptcy. That interest is the "fresh start." The "fresh start" concept, now deeply entrenched in the bankruptcy psyche, was first discussed by the United States Supreme Court in Local Loan Co. v. Hunt, where the Court emphasized the rehabilitative function of bankruptcy.3 Central to a "fresh start" is the discharge in bankruptcy, which frees a debtor's future income from existing creditor claims. As noted by Professor Thomas Jackson, a discharge preserves a debtor's "human capital."4

While discharge frees a debtor's future income from existing creditor claims, the discharge alone does not define the "fresh start." A related, and often coequal, component of the "fresh start" is property exemptions. what property should a debtor be entitled to keep to begin his post-bankruptcy trek toward rehabilitation? The answer to this question can determine the efficacy of the "fresh start." A debtor freed from creditor claims but left in an abject state of balance sheet poverty faces higher hurdles to rehabilitation than a debtor left with substantial property. This difference is particularly acute when the types of property held by the latter debtor enable him to seek and sustain employment. simply put, a discharged debtor with a car, computer, and applicable "tools of the trade" is in a superior position to mount a "comeback" than a similarly situated discharged debtor retaining little to no property. while discharge enables a fresh start, exemptions determine the location of the starting line in the debtor's race toward rehabilitation following bankruptcy.

Congress weighed in on where the starting line should be in 1978. Following nearly a century of silence on the question of what specific exemptions should apply in bankruptcy,5 Congress passed a detailed set of federal bankruptcy exemptions in 522(d) of the Bankruptcy Code. These federal exemptions were more generous to debtors than most state exemptions, and they included a so-called "wild card" exemption mechanism making them even more favorable to debtors.6 Categories of property were included to protect certain dollar amounts in a debtor's homestead, motor vehicles, household goods and furnishings, jewelry, and the like.7

After clearly articulating its vision of the appropriate exemptions level in bankruptcy, Congress undermined it by allowing states the right to "opt out" of the federal exemptions.8 The line was drawn, but Congress provided states with erasers. Predictably, this odd "line plus erasers" structure was the result of a political compromise between the House and Senate.9 Since passage of the Code, exemptions are now determined under this concurrent system-federal exemptions apply in bankruptcy, unless the debtor's state has opted out, in which case exemptions are determined by state law.10 Over two-thirds of states opted out of federal bankruptcy exemptions, leaving Congress's determination of appropriate exemptions available to residents of only thirteen states.

Following enactment of the Code, scholars and commentators leveled searing criticisms of the concurrent exemptions system in bankruptcy. Some attacked the constitutionality of the "opt out" provisions on the bases of the Bankruptcy Clause's call for "uniform Laws," the Supremacy Clause, or both. Prominent in these criticisms was the argument that debtors in "opt out" states were being deprived of the same "fresh start" afforded to debtors in states permitting federal exemptions. …

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