Current unemployment levels have forced a significant portion of homeowners to contemplate bankruptcy. In an attempt to avoid the impending bankruptcy, those homeowners have sought new employment - even when that meant moving to a different state. Yet crossing state lines may be the worst strategy for a debtor contemplating bankruptcy. Most jurisdictions condition the homestead exemption in bankruptcy on residency requirements: to exempt a home from creditor claims in bankruptcy, a debtor must have lived in her current domicile for two years. Thus, the unemployed debtor who is trying to avoid bankruptcy by moving out of state to begin new employment sets herself up for a tremendous disadvantage should bankruptcy become necessary in the new state. Her move requires her to gamble her homestead protection in bankruptcy against the likelihood that new employment will keep her out of bankruptcy. Faced with this dilemma, the savvy debtor would do well to file for bankruptcy protection before moving. To be sure, bankruptcy laws create a perverse incentive for debtors to file bankruptcy prior to relocating out of state. Bankruptcy laws were never intended to present debtors with this dilemma. For that matter, they were never intended to create an incentive to file for bankruptcy. This article challenges the assumptions that underlie the present failing of bankruptcy law regarding homestead exemption requirements. It then proposes statutory changes that will eliminate this problem. Specifically, bankruptcy statutes must firstly adopt a standard for exemption eligibility that coincides with venue requirements; secondly examine the relative financial impact of the relocation; and thirdly repeal the dollar cap on homestead exemptions in the context of relocation. These simple changes will both promote overall re-employment that requires interstate relocation and prevent unnecessary bankruptcy filings.
Available at: http://works.bepress.com/timothy_tarvin/2/