Bankruptcy courts will use the “state-specific” approach to exemption laws to decide if a debtor may use the exemptions from his former domicile state with respect to property located in the bankruptcy state. Sheehan v. Ash, No. 17-1867 (4th Cir. May 4, 2018).
Keith and Phyllis Ashfield filed a chapter 7 in West Virginia and used the exemption laws of their previous home state, Louisiana, to exempt approximately $3,500 in various items of personal property located in West Virginia. Naturally, the West Virginia trustee did not like the application of the Louisiana exemption law and filed an objection. The bankruptcy court overruled the objection and the district court affirmed. Sheehan v. Ash, No. 1:16-cv-109 (N.D. W. Va. June 27, 2017).
Under Section 522(b)(3)(A) of the Bankruptcy Code, a debtor must use the exemptions applicable in the state in which he has been domiciled for the 730 days prior to filing for bankruptcy. But ff the debtor has not lived in a single location for 730 days, he must use the exemptions from the state in which he primarily lived in the 180 days preceding the 730 day period. This rule may create an unusual situation where a debtor is ineligible for any exemptions such as when a state restricts its exemptions to current residents. In that scenario, the section allows the debtor to use the federal exemptions. Here, the Ashes moved to West Virginia within the 730-day period and had lived in Louisiana prior to that. Louisiana’s exemptions are not restricted to current residents of the state.
To rule on the appeal, the Fourth Circuit considered the three approaches to the application of a state’s exemptions to a case filed outside that state.
1. “Anti-extraterritorial” approach – No out-of-state exemptions can be used on property located in the bankruptcy state. The court held that this approach contradicted portions of the federal exemption provisions and was not workable.
2. “Preemption” approach – As the name suggests, this option overrules the state laws and applies the exemptions for where the case is filed to apply to both non-residents and property outside the state. This approach undercuts the federal provision for recourse to the federal exemptions and was rejected.
3. “State-specific” approach -This approach allows a debtor to use the exemption law of his prior domicile if appropriate under section 522(b)(3) and if those state laws permit extraterritorial application.
The court found that the state-specific approach best captured the intent of the federal exemptions and Congress’s preference for debtor-friendly interpretation of exemption laws. In doing so, the Fourth Circuit joined the majority of the courts that also follow this approach.
