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Residency & Bankruptcy Exemptions

Why does your residency matter?

Many people ask, "What are the residency requirements to qualify for bankruptcy?" Residency doesn't decide whether you can file some type of bankruptcy, it determines where you can file bankruptcy and which set of property exemptions will apply to your case. For information on how residency affects where you can file, click here.

More Than One list of Exempt Property.

What you get to keep in a Chapter 7 case, which is what most people file, is called your "exempt property." When the current Bankruptcy Code was passed, Congress made up a list of the items you can exempt, now called "the Federal List." However, Congress also gave permission to the individual states to decide whether they preferred their own list of exempt property rather than use the Federal List. The legislatures of 37 states decided not to use the Federal List, but rather to use their own list of exempt property. In so deciding it is said those 37 states "opted out" of the federal scheme on exempt property. Some legislatures decided to go further and passed laws that their citizens would have their choice to use either that state's exemptions or the federal list, whichever they liked better. As a result of all this, what property you are allowed to "exempt" in a Chapter 7 varies from state to state, and this can be a huge factor in some bankruptcy cases. Florida is one of the states that "opted out." What you get to exempt in a bankruptcy case filed in Florida is different from what you can exempt in a bankruptcy case filed in any other state. One of the most famous exemptions under Florida law is our "homestead exemption." Our homestead exemption law states you can keep a homestead, up to one-half acre of land inside the city limits with your residence, or up to 160 acres of land if located outside a city (obviously with farmers in mind, though it is not limited to farmers.)

Moving to Florida to File a Bankruptcy

One of the most startling aspects to this law is what is not mentioned, and that is the dollar value of the homestead. And, in fact, though there is an acreage limit, there is no dollar limit! So in your bankruptcy you could exempt a million dollar house (though not much furniture) and your creditors might not be able to touch it. Of course, most people living in million dollar homes aren't in need of a bankruptcy case at all. But what happened was that people from other states, for example, Kentucky, who found themselves in financial trouble, would sell all their assets, and move to Florida. Then they would use all that cash to buy a huge Florida home, move in, wait 91 days, and then file bankruptcy, asserting their "homestead" exemption to protect the new home. Then, after the bankruptcy was all over, they could sell that home and do what they wanted with the money. It was clever, but it really made a lot of people very angry, and Congress decided to stop the path of people moving to Florida just to take advantage of our generous homestead law. In reality, it didn't happen very often, but when it did it resulted in spectacular headlines and left many people with steam coming out of their ears. So how did Congress plug this leak?

Plugging the Homestead Leak

Congress passed a new law on bankruptcy exemptions. The most important change in the rule of exemptions involves residency. Under the new rule you can't use Florida exemption laws in a bankruptcy case unless you have lived in Florida for 24 consecutive months before you file your case. Once you have lived here two years, you can file here and use Florida exemption laws. But if you haven't lived here for 24 months, the Court ignores that last 24 months and instead focuses on the 6-month period of time just before that 24-month period. Then the courts says "In what Federal District did you live for the greatest number of days in the period of 30 through 25 months before you filed your case?" The exemption law applicable to the state where that Federal District is located is what will be applied to your case. It even gets trickier. If you find that you must use the exemption law of a different state, sometimes you will find that state says that its exemption laws only apply to residents of that state. Hmm. Does that apply to you? You are now a resident of the state of Florida, but you haven't lived here 24 months. So you can't use Florida exemption law. And it looks like you can't use the law of the state of the law you came from either, because that law is only for residents there, which you aren't. So what happens? Actually, this is a hot area of the law right now, but most Courts say that in a case like this, you apply another bankruptcy statute that says if the rule leaves you with no exemptions at all, you are permitted to use the Federal List. You should know that the Federal List is quite generous other than the homestead, so it can be a real exercise in planning to time your bankruptcy filing correctly.

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