Bankruptcy exemptions allow debtors a “fresh start,” and allow bankruptcy attorneys to plan a “best case scenario” for their clients. The U.S. Constitution provides Congress with the power to establish uniform bankruptcy laws throughout the U.S., and procedurally most of bankruptcy is a uniform process throughout the nation.
Federal also provides each debtor with specific exemptions from the bankruptcy process, such as $21,625 federal bankruptcy homestead exemption and $3,450 in a motor vehicle. (11 U.S.C. § 522(d)(1)). But the bankruptcy code also provides that states may enact their own special bankruptcy exemptions. (11 U.S.C. § 522(b)). Most states have taken advantage of this option, to a varying degree. While most state exemptions are fairly congruent with the federal exemptions, there are a few outliers, such as South Dakota’s 100% absolute homestead exemption, at least on one acre.
Courts across the country are beginning to question the constitutionality of the individual state exemptions. (See, e.g., 347 B.R. 626 (Bankr. W.D. Mich. 2006); In re Pontius, 421 B.R. 814, 816 (Bankr. W.D. Mich. 2009)). Several courts have held state bankruptcy exemptions to be unconstitutional because they infringe on the authority delegated to Congress by the Bankruptcy Clause of the U.S. Constitution, which the Congress cannot then delegate to the states. This would, in theory, destroy the uniformity of bankruptcy laws sought by the Founding Fathers.
Nonetheless, most courts have concluded that the system is constitutional. (See, e.g., Richardson v. Schafer, 689 F.3d 601, 603 (6th Cir. 2012). These Courts have upheld state exemptions because they are not preempted under the Supreme Court’s analysis and they actually further the “fresh start” policy of the Bankruptcy system.
Only time will tell whether the system is constitutional. For now, debtors and bankruptcy attorneys must rely on the federal/state exemption scheme to best plan their client’s debt relief strategies. More information is available in Argyle’s Attorney’s Handbook on Consumer Bankruptcy and Chapter 13.