As discussed in one of our previous blog posts, debtors in bankruptcy are able to “exempt” certain property up to a particular dollar value. This means that a Chapter 7 Trustee is not entitled to take any property from a debtor which is exempt under the law. If the debtor has an asset over the allowable limit, the Trustee is entitled to take the asset, sell it, and apply the money toward creditors’ claims.
As one common example, a single person in Oregon can claim $40,000 in equity in a home as exempt. So, if a debtor has a home worth $300,000, but has a $260,000 mortgage owing against it, he or she is safe in that there is only $40,000 in equity in the property. But if the home is worth $350,000, the Trustee would be able to sell the home, pay off the mortgage, give the debtor his or her $40,000 exemption, and distribute the remaining $50,000 to creditors. (For this purpose, I am ignoring the costs of sale of the home [realtor’s commission and closing costs].)
Most legal issues concerning bankruptcy are determined by federal law (i.e., the Bankruptcy Code). However, with respect to exemptions, state law is generally used to determine whether the debtor must claim exemptions allowed under state law or those allowed under federal law. In some states, the debtor is allowed to choose between state and federal exemptions.
Oregon is not one of those states. Debtors filing for bankruptcy in Oregon are generally limited to state exemptions, and are prohibited from claiming federal exemptions. Washington is different, and allows the debtor to choose between state and federal exemptions.
The federal exemption for real estate used as a residence is not quite as generous as the Oregon exemption; it protects only $22,975 in equity. However, if a debtor either does not own real estate, or has no equity in it, federal exemptions can be used to protect property which might be lost using state exemptions. Debtors using federal exemptions can protect up to $1,125 plus up to $11,500 of any unused homestead exemption in any property. This is often referred to as the “wildcard” exemption. And, as a recent Ninth Circuit case held, “any property” means exactly what it says” — any property, even if it is a luxury item.
For another example, let’s say that a debtor has a house worth $300,000 (with a $320,000 mortgage against it), and a boat owned free and clear worth $12,625. Because the house has no equity in it, there is no real need to exempt it. As to the boat, the debtor would not be able to keep to boat if he or she filed for bankruptcy in Oregon as there is no allowable exemption (except for perhaps the $400 “wildcard” exemption). However, in Washington (and other states which allow debtors to choose federal exemptions), the debtor could exempt the full value of the boat, and keep it out of the hands of the Trustee.
Fortunately (for debtors, unfortunately for Chapter 7 Trustees), House Bill 3520 is currently pending before the Oregon Legislature which would allow debtors in bankruptcy to choose between state and federal exemptions. The bill passed the House on May 15, 2013 on a vote of 50 to 9. It has now been sent to the Senate where it is awaiting a hearing before the Judiciary Committee. Democrats hold only a slim majority in the Senate (16 to 14), so its passage in the Senate is unclear. Governor Kitzhaber has not announced a position on the bill should it pass the Senate.
This post is intended to be purely informational in nature, and cannot be considered legal advice. If you have questions related to exemptions in bankruptcy, please call our office at (503) 545-1061 (Oregon cases) or (360) 836-4238 (Washington cases) to schedule a free initial consultation.