Each state has its own bankruptcy exemption system that determines how much property you are allowed to keep if you file a Chapter 7 bankruptcy or what you must pay to certain creditors if you file a Chapter 13 bankruptcy. Because some states have generous exemptions while others have more meager exemptions, knowing which state’s exemptions you can use is very important before filing bankruptcy. (For more articles on how exemptions work, see the articles in Bankruptcy Exemptions.)
Which exemptions are available to you depends on where your “domicile” was prior to the bankruptcy.
Your domicile is essentially where you consider your permanent residence to be. This means that it’s where you are registered to vote, pay taxes, and intend to make your permanent home. Usually this is where you live; however, it doesn’t have to be where you are currently residing. For example, if you normally live in California but you are temporarily living in Texas for a work assignment, your domicile is still California.
If you have been domiciled in your current state for the 730-day (two-year) period prior to filing your bankruptcy then you can use that state’s exemption system (or the federal exemptions if that state allows you to use them). This rule ensures that people don’t temporarily move to another state just to file bankruptcy and take advantage of that state’s more generous exemptions. But if you have not been domiciled in the same state for two years, then we must look to the 180-day rule to determine your state exemptions.
If you did not have the same domicile for the two years prior to filing bankruptcy, then you must use the exemptions of the state where your domicile was for the better part of the 180-day period before that two year period. For example, if you filed for bankruptcy on January 1, 2011, and you did not have the same domicile for the preceding two year period, then you look at where your domicile was during July 1, 2008, through December 31, 2008, and use that state’s exemptions.
Sometimes the rules stated above may result in you not being eligible to use any state’s exemption system. In that case, you must use the exemptions under the federal system. This may happen because some states require you to be domiciled there or be a current resident before you can use their exemptions. So if you can’t satisfy the 730-day rule and your domicile state under the 180-day rule won’t allow you to use its exemptions because you don’t live there anymore, then you can use the federal bankruptcy exemptions.
Many states have homestead exemptions you can use to exempt and protect the equity in your home. Some states have very generous or unlimited homestead exemptions. However, if you have not owned your home in that state for 40 months prior to filing the bankruptcy, federal law will limit your state’s homestead exemption to $160,375 even if you otherwise qualify to use that state’s exemptions. But if you sold a home and used the proceeds to buy a new home in the same state then you can combine the ownership time of both homes to satisfy the 40-month rule.