People often think that chapter 7 cases are easy, straight forward and uncomplicated. It’s easy, right? An attorney just buys a computer software bankruptcy program, inputs some information, files the case, goes to the 341 hearing and then waits for the discharge order. While I certainly don’t turn down simple cases, I do come across many cases that are complex and challenging. As an example, let me tell you about a case in which the debtor lived in Florida most of his adult life and then moved to Michigan. We will call him “Joe.”
Joe is a medical doctor who lived and practiced medicine in Florida for many years. He personally guaranteed millions of dollars in bank loans for a medical practice that ultimately failed. Joe, and his wife, Mary, lived in a home in Florida that was held in Mary’s revocable trust. Their other significant assets included a Florida bank account held as tenants by the entireties. They also owned things such as household goods, artwork, jewelry, retirement accounts, clothing and family pictures. After the business closed, Joe and Mary wanted to be near their grandchildren in Michigan so they put the Florida house on the market and bought a home in Michigan, and titled it as entireties property. They left the money in the Florida entireties bank account. After they were established as residents in Michigan, the Florida home sold and the closing documents contained directions to wire transfer the proceeds to the Florida entireties bank account which provided the account with a healthy balance of $600,000. The business debt was all in Joe’s name. He and Mary had no joint unsecured debts.
The creditor law suits on the personal guarantees heated up and Joe found himself having no choice but to file chapter 7. He had lived in Michigan more than 90 days at the time, so proper venue for the bankruptcy case is Michigan. What assets can Joe claim as exempt in his chapter 7 case?
Generally, when a debtor files bankruptcy in Michigan, they get to choose the Michigan or the federal bankruptcy exemptions. Congress wanted to discourage debtors from moving to other states to file bankruptcy, simply to take advantage of what might be more generous exemptions in their particular situation. So, when a debtor like Joe has to file bankruptcy, the bankruptcy code requires that he use the exemptions which are allowed under the law of the state of his domicile. To determine domicile, we had to look at where Joe lived during the 730-day period preceding the filing of the chapter 7. But, since Joe did not live in one state during the entire 730-day period, we had to use the exemption laws of the state in which he was domiciled for the 180 days preceding the 730-days. In our case, that means that Joe’s domicile for exemption purposes is Florida. Sounds straight forward so far, right? Joe is a Michigan resident, but he needs to claim the Florida exemptions to try to protect his assets.
Joe had to make a choice of whether he should or can claim his exemptions under either 11 USC § 522(b)(2), the federal exemptions, or under § 522(b)(3) the non-federal exemptions. His domicile for exemption purposes is Florida and Florida has opted out of the Federal exemptions and requires its residents to use the Florida exemptions. That means that the federal § 522(b)(2), exemptions are unavailable. So, Joe must look to the exemptions under §522(b)(3) which permits him to claim the following assets exempt:
§ 522(b)(3)(A)- those exemptions available under the law of his domicile state (Florida);
§ 522(b)(3)(B)- Property held as tenants by the entireties if exempt under applicable non-bankruptcy law; and,
§ 522(b)(3)(C)- Tax exempt retirement funds.
Can Joe exempt his household goods, artwork, jewelry, clothing and family pictures under § 522(b)(3)(A)? While the bankruptcy Code requires Joe to use the Florida exemptions, the Florida exemptions are widely held to be available only to Florida residents. Joe may be domiciled in Florida for bankruptcy exemption purposes, but he is no longer a Florida resident. So, an argument can be made that Joe cannot use the Florida exemptions. If Joe can use the Florida exemptions, are the Florida exemptions permitted to have extraterritorial application to property located outside its borders? The household goods, artwork, jewelry, clothing and family pictures are all now located in Michigan. The bank account is in Florida, but can be readily accessed in Michigan. The Michigan home is obviously located in Michigan. Which state’s laws govern?
Learn more in part 2 of this 3 part blog series.
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