My last blog asked how long you need to live in California before being able to file bankruptcy here. In general you must live here for at least 91 days.
I ended that blog post saying that “[j]ust because you have venue [so that you can file your bankruptcy case] in a particular bankruptcy court does not necessarily mean that you can use the exemption laws of the residents of that state. The timing rules are different.”
In other words, just because you’ve lived in California for at least 91 days does not necessarily mean that you can use the California exemptions to protect your assets. When can you?
WHAT ARE PROPERTY EXEMPTIONS?
Property exemptions determine the types and amount of your assets that you can protect from your creditors and keep for yourself when filing bankruptcy. Property exemptions are among the most important protections you have in bankruptcy.
The rationale for exemptions is that you really wouldn’t get a meaningful fresh financial start if you have to give everything to your creditors. It would be extremely difficult to get back to being a fully functioning member of the U.S. economy if you had to start with absolutely nothing. So exemptions protect a basic set of your assets so that you have what you need to put the past behind you and then get ahead.
SINCE BANKRUPTCY IS FEDERAL LAW, ARE PROPERTY EXEMPTIONS THE SAME EVERYWHERE?
Not at all. Each state has its own set of property exemptions. Plus there IS set of federal property exemptions in the Bankruptcy Code. When filing bankruptcy in certain states you can choose between your state’s set of exemptions and the federal set of them. But California (and the majority of other states) has chosen to opt out of this option for its residents. So in California you’re stuck with the California state exemptions (assuming you qualify).
The state exemption laws can vary wildly from state to state. Take the example of the homestead exemption, which protects your home and the equity in it. On one extreme, Tennessee and Kentucky state laws give an unmarried single person a homestead exemption of only $5,000. On the other extreme there are more than a half-dozen states with no dollar limit at all on their homestead exemption. And other states have very high limits, for example Nevada at $550,000, and Massachusetts and Rhode Island at $500,000.
So, which state’s exemptions you can use can make a huge difference. Particularly, if you’ve moved from another state relatively recently whether, when you file bankruptcy in California, you are entitled to use the California exemptions or instead must use your prior state’s exemptions can be very important.
WHAT PRACTICAL DIFFERENCE DOES THIS MAKE IN A BANKRUPTCY CASE?
In a Chapter 7 “straight bankruptcy” case, property exemptions determine whether you can keep everything you own. If something you own doesn’t fit within the exemption categories and amounts, the bankruptcy trustee can take and sell those assets and pay the proceeds to your creditors.
Or you can file a Chapter 13 “adjustment of debt” case so that you can protect and keep any such “non-exempt” assets. Depending on the situation, doing so can require you to pay more to your creditors over the course of the court-approved payment plan.
The practical reality is that most people filing do not lose anything either because everything they own is covered by the available exemptions or is protected through Chapter 13. Plus sometimes if you are filing bankruptcy you may be willing to let go of something you own in return for the benefit of being relieved of your debts.
On the other hand often it’s important for you to keep what you own. And using a 3-to-5-year Chapter 13 payment plan to preserve an asset can be a very high price to pay in terms of the delay in fixing your credit and restoring your financial life overall.
So, if you’ve moved recently to California knowing whether you can use California’s property exemptions instead of your former state’s exemptions can make a big difference.
SO WHEN CAN I START USING CALIFORNIA’S EXEMPTIONS?
As explained in my last blog post, in order to file bankruptcy in California, this state must be, for at least 91 days before filing, your “domicile,” your residence, or where either your “principal assets” or your “principal place of business” is located. (28 U.S.C. §1408.)
The rules for when you can use California’s property exemptions for that bankruptcy filing are much tighter, in two ways.
First, the time frame is longer. You must use the exemptions applicable for “the place in which [your] domicile has been located for the 730 days [2 years] immediately preceding the date of the filing of the [bankruptcy case].” So you must have been “domiciled” (more on that word in a moment) in California for a full two years before you can use the California property exemptions.
Second, having your “principal assets” or your “principal place of business” in California doesn’t allow you to use its exemptions, only being “domiciled” here.
WHAT DOES IT TAKE TO BE DOMICILED IN CALIFORNIA?
The statute focuses on where your “domicile has been located” for the prior 730 days. What exactly is your domicile?
The term is not defined in the Bankruptcy Code, but it generally means where you are living, with the intent of that place being your home.
So if you are a long-term California resident who temporarily moved out of state during the last two years, were gone for a limited period of time, always intended to return to California, and have now moved back here, there is a good chance that your domicile was in California throughout that time.
It helps to have some evidence of your intent to return to California, such as keeping your California driver’s license. It also helps if your purpose for being elsewhere was intended to be of limited duration—to get a temporary job or to take care of dying parent, for example.
If you did keep your California domicile during the last 2 years, you can use the California exemptions even though you weren’t physically here during his period.
WHAT IF I’VE MOVED HERE WITHIN THE LAST TWO YEARS?
What if you’re now domiciled in California because you moved her with the intent to make this your home, but that move was less than two years ago? Or what if you’ve moved more than once in the last two years, each time with the intention of making the place your home, and so have had two or more domiciles in that period?
If so, the law says you must use the property exemptions for the “place in which [your] domicile was located for 180 days immediately preceding” the 2-year period. In other words, you look to where you were domiciled during the 6 months BEFORE the 2-year period before filing bankruptcy.
WHAT IF I LIVED IN AND WAS DOMICILED IN MORE THAN ONE STATE DURING THOSE 6 MONTHS?
If so, you use the state exemptions of the state “in which [your] domicile was located . . . for a longer portion of such 180-day period than any other place.”
COULD YOU GIVE SOME SIMPLE EXAMPLES?
First, consider if you’d filed a bankruptcy case on January 1, 2016, after having moved to California 1 year earlier with the intent to make this your home, and after living and being domiciled in Nevada for 3 years before that. Because you hadn’t been domiciled in California for 730 days/2 years, look to where you were domiciled during the 180-day/6-month period just prior to the two years before filing. Since that was Nevada, you would use the exemption available to Nevada residents.
Note that you’d still be allowed to file in California for having been domiciled here for at least 91 days; your attorney would just use Nevada property exemptions. Depending on what assets you own, Nevada’s exemptions may protect them as well as California’s would.
Second example, take the same scenario except instead of having been domiciled in Nevada for the 3 prior years, you were there for only 14 months. Before that you’d lived in and been domiciled in Texas for a year. That is, a year in Texas, 14 months in Nevada, then the final year in California before filing the bankruptcy case. Because you hadn’t been domiciled in California for 730 days/2 years, look to where you were domiciled during the 180-day/6-month period just prior to two years before filing. That was Nevada for 2 of those 6 months, and Texas for the remaining 4 of those 6 months. Since of those 6 months you were domiciled in Texas more than in Nevada (4 vs. 2 months), you would use the exemption available to Texas residents—even though that was 2 states ago.
Again, you’d be allowed to file in California but would use the exemptions available to Texas residents.