Bankruptcy exemptions are designed to PROTECT your assets
One of the most fundamental tasks that an Omaha bankruptcy attorney must quickly and effectively determine is what assets of his or her client are safe and protected if a bankruptcy is filed and which are not, if any. If you don’t get that analysis right, there will be BIG trouble ahead. Normally, this is a fairly straight forward determination. Most assets are clearly identifiable and may be easily pigeonholed into the proper exemption category. However, there are times when the answer of whether or not an asset is safe is agonized over for days or weeks by a bankruptcy attorney. Sometimes, the answer is that there is no clear answer and your client must take a chance at filing the bankruptcy after being thoroughly briefed on the matter. Moreover, sometimes the outcome of whether or not an asset is protected by an exemption must be litigated before the Bankruptcy Court.
The exemption analysis process begins by choosing the proper set of exemptions to apply to a case. Federal bankruptcy law generally provides for each individual state to choose what exemptions their citizens may select. Typically, the set of exemptions available to a person filing bankruptcy in the State of Nebraska, for example, will be provided by Nebraska law. Similarly, a person filing bankruptcy in Council Bluffs, IA will be utilizing the bankruptcy exemptions provided under Iowa law. Therefore, WHERE you file bankruptcy determines, in large part, WHAT is PROTECTED in bankruptcy. And, where you are able to file bankruptcy is determined by your residency for the greater part of the last 180 days.
Shopping for a better set of bankruptcy exemptions is now much harder
In the “old days,” some people with a lot of assets and also needing to file bankruptcy would shop around for the best deal with respect to protecting their assets in bankruptcy. For example, some states such as Florida and Texas allow their citizens to protect almost ALL of their equity in a personal residence. California is also very generous in handing out exemptions. If you don’t own a home, you could protect more than $15,000 in cash or other personal assets easily. So, a lot of individuals used to move to a state that provided a more generous set of bankruptcy exemptions and then file bankruptcy after being there for 91 days (the majority of the last 180 days).
As of 2005, there is a strict look-back period for exemptions. In general, you must apply the exemptions where you lived about 2.5 years ago. There are tricky exceptions to these rules too. Sometimes, if a person moved a lot in the last several years, exemptions provided directly by the Federal government apply, not those of the various 50 states.
Almost all individual debtors in bankruptcy have both State and Federal exemptions available to them for specific assets
To make things even more confusing, the type of asset in which protection is sought makes a big difference. Typically, ERISA qualified retirements funds are automatically protected under Federal bankruptcy exemptions which every individual debtor is entitled to, regardless of their state of residency. For example, 401(k)s are exempt from your creditors as are IRA accounts. Similarly, pensions and most other state provided retirement accounts are exempt. There are a few exceptions, but most are exempt. The point is that some assets are protected under Federal exemption laws while other assets must be rely on state law for protection. Knowing which specific assets are protected and in which combination (Federal or State law) is critical to understanding how to protect assets in bankruptcy.
The Part II on Bankruptcy Exemptions will focus on the specific details of assets that are protected when filing bankruptcy in Nebraska.