Filing a bankruptcy petition creates a bankruptcy estate consisting of all the debtor’s legal or equitable interests in property, plus any proceeds generated from the disposition of property of the estate. Once a debtor’s asset becomes property of the estate, all the debtor’s rights in that property are extinguished, unless the property is “exempted” under section 522 of the Bankruptcy Code or is otherwise abandoned back to the debtor. Accordingly, while creditors are entitled to seek reimbursement in the rest of the bankruptcy estate, the debtor may retain his or her interest in exempted property.
Thus, section 522 of the Bankruptcy Code lays out the federal exemptions, which list all property that a debtor may reclaim from the bankruptcy estate. However, under the Bankruptcy Code, each individual state may also pass conflicting state exemption laws. As a result, a debtor could be eligible for both the federal exemptions and a state’s exemption laws, in which case the debtor must choose which exemption scheme to assert. However, a state may also elects to “opt out” of the federal exemption scheme. When a state opts out, it rescinds the federal exemptions as an option, such that debtors domiciled in that state can only invoke the state exemption laws.
When a bankruptcy court must address precisely which exemption laws are available to a debtor, the plain text of section 522(b) typically provides a dispositive answer. According to section 522(b)(3), a debtor must be domiciled in a given state for a certain number of days prior to filing for bankruptcy in order for that state’s exemption laws to apply. If the requirements of section 522(b)(3) are not met, then the state exemption laws are unavailable to and nonbinding upon a debtor, regardless of any opt out restrictions. And, where section 522(b)(3) renders the debtor ineligible for any state’s exemptions, the federal exemptions will always be made available.
This Article, however, will discuss a notable “grey area” of section 522(b), which Bankruptcy Courts throughout the country have struggled to interpret uniformly. Specifically, this Article will analyze whether there is an “implied residency requirement” in section 522(b) that forbids a debtor who files for bankruptcy shortly after changing his or her state of residence, from invoking the state exemption laws of his or her former state. Part I will discuss section 522(b)(3) generally. Part II will examine the current court split as to whether section 522(b)(3) contains an implied residency requirement. Finally, Part III will analyze the issue more broadly, addressing the practical implications of court adopting each side of the court split.