For more information scroll down to the bottom or click here! State Exemption Laws Current Status In Each Jurisdiction Every jurisdiction in this country exempts certain property from execution of judgments: Exemption laws operate by blocking creditor collection efforts against exempt property. For example, a creditor would not have the right to have the sheriff seize exempt property pursuant to a writ of execution. If the exempt property were seized, the debtor would have a valid action for conversion. Judicial liens in favor of the creditor, such as execution liens or judgment liens, will not attach to exempt property. Charles Jordan Tabb, The Law Of Bankruptcy (Westbury, New York: The Foundation Press, 1997), § 9.1 at 641. The exemptions are either statutory or constitutional. "The extent of the generosity to the debtor of a state exemption law differs from state to state." Id. at 640. Furthermore, exemptions are a privilege of the debtor; thus, they may be waived. Id. at 642. Where the exemption applies to a place of dwelling, the exemption is termed a "homestead." As indicated, the laws of the various jurisdictions differ. It would be impossible to concisely summarize the various statutory and constitutional exemption laws available in this country. Instead, attached is a jurisdiction-by-jurisdiction review of the current state of exemption laws in this country, in alphabetical order. This information, which is current as of January 1999, was obtained from Lawrence P. King, Mary Davies Scott, Robert Lefkowitz & Gabriel Minc, Collier On Bankruptcy, Vol. 14 ("Exemptions"), (New York: Matthew Bender & Co., Inc., 15th Revised Edition 1999). Where exemptions attach, the protection afforded is nearly absolute. This is exemplified by Nevada's approach to exemptions. Nevada Revised Statutes (NRS) § 21.090 is entitled "Property exempt from execution." It exempts various categories of property from execution, at various monetary amounts. The only exceptions are for executions issued upon a judgment to recover the price of the property or for a mortgage or other lien thereon. See NRS § 21.090(2). Outside of these exceptions, the exemptions are absolute and unqualified and remove the property beyond the reach of legal process in all cases. See Elder v. Williams, 16 Nev. 416 (1882). The purpose behind the exemption law is to secure for the debtor the necessary means of gaining a livelihood, while simultaneously doing as little injury as possible to-the creditors. See Krieg v. Fellows, 21 Nev. 307, 30 P. 994 (1892). It must be remembered, however, that only those properties specifically cited in NRS § 21.090 are exempt from execution. See In re Richards, 57 B.R. 662 (D. Nev. 1986). The homestead protection in Nevada is of constitutional origin. Article 4, §.30 of the Nevada Constitution reads, in pertinent part: A homestead, as provided by law, shall be exempt from forced sale under any process of law, and shall ‘not be alienated without the joint consent of husband and wife when that relation exists; but no property shall be exempt from sale for taxes or for payment of obligations contracted for the purchase of said premises, or for the erection of improvements thereon.’ This constitutional mandate is codified in NRS § 115.010. Other portions of NRS Chapter 115 also concern various aspects of homesteads. Homestead protection is limited to $125,000, NRS § 115.010, and must be declared in writing and filed to be effective. NRS § 115.020. Homesteads include dwelling units and lands, as well as mobile homes. NRS § 115.005. The homestead exemption is limited by the constitutional and statutory provisions which created it, Smith v. Stewart, 13 Nev. 65 (1878); Jackman v. Nance, 109 Nev. 716, 857 P.2d 7 (1993), but is to be construed liberally in favor of the persons for whose benefit it was created. Roberts v. Greer, 22 Nev. 318, 40 P. 6 (1895); Jackman, supra. To this end, homestead is not limited strictly to a residence. If a dwelling is used for a business purpose, and also serves as a bona fide residence, homestead rights still attach. Jackman, supra (citing Clark v. Shannon, I Nev. 568 (1865) and Smith, supra). Further, a declaration of homestead filed after an attachment is levied on a property, but before a judgment is rendered, is still effective to exempt the property from execution. See Herndon v. Grilz, 112 Nev. 873 920 P.2d 998 (1996). The same rule holds even if the declaration of homestead is filed simultaneously with a judgment lien against the property. Id. In order to gain homestead protection, substantial compliance with the applicable statutes must occur. See McGill v. Lewis, 61 Nev 28, 111 P.2d 537 (1941). Once this occurs, however, homestead protection is absolute up to the constitutional and statutory limits. See Hawthorne v. Smith, 3 Nev. 182 (1867); Massey-Ferguson, Inc. v. Childress, 89 Nev. 272, 510 P..2d 1358 (1973). Although each jurisdiction in this country provides different amounts for each type of exempted property, the basic rules are the same all over. Exempt property is immune to execution, period, up to the amount of exemption provided by the particular law at issue, subject to any exceptions built into the law. (Such as the payment of taxes as provided in Nevada Constitution Article 4 § 30). This is shown by In re American Business Machines, Inc., 6 B.R. 166 (D. Nev. 1980). Here, a husband and wife had filed a- homestead declaration, later sold the property. The federal government had a tax lien against the husband. The court allowed execution of the lien against the husband's half of the proceeds on the basis of federal tax law and the doctrine of federal supremacy. This case is powerful evidence of the force of a federal lien. This issue will be discussed in the next section. Federal Liens In Non-Bankruptcy Cases "One potential creditor of whom every secured creditor must be acutely aware is the United States. It may become a creditor in a variety of ways, but its tax claims and claims that arise out of the lending and guaranty powers of various agencies are two of the most likely reasons for inclusion of the government among the panoply of creditors." Vern Countryman, Andrew L. Kaufman & Zipporah Batshaw Wiseman, Commercial Law (Boston: Little Brown and Co., 1982), at 328-29. In non-bankruptcy collective proceedings involving an insolvent debtor, claims of the United States must be paid first. Tabb, supra, § 7.19 at 520. The source of this power is Revised Statute (R.S.) § 3466, now codified at 31 U.S.C. § 3713(l). Id. at 520 n. 1. The rule of R.S. § 3466 has been in force since 1797. (Act of March 3, 1797, ch. 20, § 5, 1 Stat. 515). Id.; Countryman, et al., supra, at 329. This priority for federal debts whenever the debtor is insolvent covers even unliquidated debts. See United States v. Moore, 423 U.S. 77 (1975). In interpreting this law, federal courts have developed the so-called "choate lien doctrine." As explained by Professor Countryman: [T]he doctrine proclaims that unless the competing lien or security interest is 'choate' at the time that the R.S. 3466 priority status of the United States arises, it is subordinate to that priority. For a lien to be 'choate,' the lienholder must be able to show that the identity of the lienholder, the property subject to the lien, and the amount of the lien are fixed and certain. Countryman, et al., supra, at 330. See also Texas Oil & Gas Corp. v. United States, 466 F.2d 1040 (5th Cir. 1972), cert. denied, 410 U.S. 929 (1973) (detailing history of the choate lien doctrine). R.S. § 3466 does not apply to bankruptcy cases filed under Title 11 of the United States Code. 31 U.S.C. § 3713(2). See Tabb, supra, § 7.19 at 520-21 n. 1; Countryman, et al., supra, at 330. The strictness of the choate lien doctrine has been limited in other ways as well. First, "the Supreme Court [has] indicated that the choateness test [is] less stringent under the federal tax lien statute than under R.S 3466. " Countryman, et al. supra, at 357. See Crest Finance Co. v. United States, 368 U.S 347 (1961); United States v. Vermont, 377 U.S. 351 (1964). Second, "the Federal Tax Lien Act of 1966 made quite explicit the fact that a number of different kinds of state law interests would prevail over the federal tax lien. " Countryman, et al., supra, at 357. The current Federal Tax Lien Act is codified at 26 U.S.C. §§ 6321-23, a part of the Internal Revenue Code. Id. at 331; Tabb, supra, § 6.49 at 465. A properly filed tax lien is given priority, but is not enforceable against purchasers of certain types of property, including securities, household goods, and motor vehicles. See id. Security interests in property created under state law also take priority over a federal tax lien if certain conditions are met. See Countryman, et al. supra, at 331-33. Third "the choateness doctrine [does] not apply when the United States [is] claiming as a secured creditor against creditors with state-created security or lien interests. Id. at 357. See United States v. Kimbell Foods Inc., 440 U.S. 715 (1979). As stated by Professor Countryman, the interests of the United States under R.S. § 3466, the Tax Lien Act, the Bankruptcy Act, and as a secured creditor under various statutes "are in a somewhat confused state." Countryman, et al., supra, at 357. One thing is relatively clear, however. Since R.S. § 3466 explicitly does not apply in bankruptcy proceedings, "it will be to the advantage of creditors generally to turn all insolvency proceedings where the United States has non-tax claims under R.S. 3466 into bankruptcy proceedings to destroy the United States' priority." Id. This will generally be to the advantage of debtors as well, since federal bankruptcy law allows state law exemptions to be used to keep property out of the bankruptcy estate. Bankruptcy Law And State Exemption Laws The traditional rule was demonstrated by the United States Supreme Court in Myers v. Matley, 318 U.S. 622 (1943). Here, a husband had a bankruptcy petition filed against him in Nevada. Subsequent to this, his wife filed for homestead protection for a tract of land in Reno, relying on Article 4, § 30 of the Nevada Constitution and the statutes promulgated thereunder. Since under state law the homestead was exempt from execution, the homestead did not pass to the trustee in bankruptcy, even though the declaration of homestead was filed after the bankruptcy occurred. The Court reasoned that a bankruptcy trustee has no more rights than would a creditor attempting to attach the property. The current bankruptcy law relies heavily on state law: The Bankruptcy Code is a federal law, codified in Title 11 of the United States Code. The substantive law applied in bankruptcy cases, however, is in the greater part governed by state law. Tabb, supra, § 1.14 at 57. The policy for this was explained by the High Court in Butner v. United States, 440 U.S. 48 1979): Congress has generally left the determination of property rights in the assets of a bankrupt's estate to state law. Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently because an interested party is involved in a bankruptcy proceeding. Uniform treatment of property interests by both federal and state courts within a state serves to reduce uncertainty, to discourage forum shopping, and to prevent a party from receiving windfall by reason of the happenstance of bankruptcy. Id. at 54-55. "To be sure, what constitutes ‘property' for bankruptcy purposes is said to be in the final analysis a question of federal law rather state law. The federal question is a matter of labeling; i.e., if an interest possesses certain attributes, the question of whether that interest will be labeled 'property' for purposes of a federal bankruptcy case is a question of federal law. However, state law determines whether a particular interest possesses the attributes of ‘property' in the first instance. Tabb, supra, § 1.14 at 58 (citing Chicago Bd. of Trade v. Johnson, 264 U.S. (1924). This is important since the Bankruptcy Code "allows the debtor to prevent the distribution of certain property by claiming it as exempt under section 522. This property is specifically excluded from distribution to creditors. " King, et al., supra, Vol. 14 at Intro-2. "The Bankruptcy Code incorporates state exemption laws, making those state exemption laws available to bankruptcy debtors. § 522(b)(2). " Tabb, supra, § 1.14 at 58. See also id., § 9.1 at 640; King, et al., supra, Vol 14 at Intro-2. Thus, one declaring bankruptcy can absolutely shield from all creditors property which is exempt under their state's law, with few exceptions. See Tabb, supra, § 9.1 at 641-42; § 9.4 at 649-51. The 4 types of debts which may be enforced against exempt property are: Nondischargeable taxes; Nondischargeable alimony, support or maintenance; Unavoided liens against the exempt property and tax liens against the property, if notice is properly. filed; and Nondischargeable debts relating to insured depository institutions, owed to A federal regulatory agency. Id., § 9.4 at 650. These exceptions involving taxes and liens are similar to those found in NRS § 21.090(2) and Nevada Constitution Article 4, § 30. Thus, other than exceptions 2 and 4, the exemptions available under the Bankruptcy Act are the same as those found under Nevada law, and the law of most other states. If the federal government has a tax lien, the lien is treated as a secured claim in bankruptcy. Tabb, supra, § 7.19 at 521. As stated by Professor Tabb: The government obviously has an interest in the collection of taxes; yet, the concern is that without any restriction imposed, tax liens might consume a disproportionate share of the bankruptcy estate, to the detriment of other creditors. The Code's resolution is to allow the avoidance of tax liens to the extent a bona fide purchaser would take free of the lien, § 545(2), and to subordinate a tax lien to higher priority claims. § 724(b). . . . [Furthermore], the trustee will be able to avoid an unfiled federal tax lien under § 545(2) or § 544(a). Id., § 6.49 at 465. Where the federal government does not obtain a tax lien, but is owed back taxes, it holds an unsecured claim. Among unsecured claims, Bankruptcy Code § 507(a) affords priority to 9 types of claims. Of these, claims of a higher class must be paid in full before claims of a lower priority class are paid. Of the 9 classes, federal taxes are listed 8th. See id., § 7.7 at 493-96; § 7.19 at 520-24. Thus, in bankruptcy cases, federal tax collections are hindered far more than in non-bankruptcy cases. Under the Bankruptcy Code, one can choose the exemptions available under state law or those found in the Bankruptcy Code itself. Tabb, supra, § 1.14 at 58; § 9.2 at 643-45; King, et al., supra, Vol. 14 at Intro-2. The selection of law is either the law of the state-of-domicile or the federal exemption; one cannot choose some of each. Id., Vol. 4 at Intro-3. However, the Bankruptcy Act allows the states to "opt-out" of the federal exemptions. In states wherein this has occurred, bankrupts can only use the law of the state of domicile. Id.; Tabb, supra, § 9.2 at 644. As of this date, 35 states have "opted-out", leaving only state law exemptions available to bankrupts in those states. Id. at 645. The 35 states are Alabama, Alaska, Arizona, California, Colorado, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Mississippi, Missouri, Montana, Nebraska, Nevada, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, South Carolina, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming. King, et al., supra, Vol. 14 at Intro-4 n. 9. Despite the fact that Article I, § 8, cl. 4 of the United States Constitution gives Congress the power "[t]o establish uniform laws on the subject of bankruptcies throughout the United States," the "opt-out" provision is constitutional, since "uniform" in the constitution refers to geographical uniformity, not personal. So long as everyone within a state is treated uniformly, Article I, § 8, cl. 4 is satisfied. See Hanover National Bank v. Moyses, 186 U.S. 181 (1902); Railway Labor Executives Ass'n v. Gibbons, 455 U.S. 457 (1982); In re Sullivan, 680 F.2d 1131 7th Cir.), cert.denied 459 U.S. 992 (1982); Rhodes v. Stewart, 705 F.2d 159 (6th Cir.), cert denied, 464 U.S. 983 (1983); Stinson v. Pitrat, 36 B.R. 947 (B.A.P. 9th Cir. 984); Storer v. French, 58 F.3d 1125 (6th Cir. 1995). Therefore, people who live in a state with generous exemption statutes are in a superior position when declaring bankruptcy than those whose state laws are less generous. If a bankrupt is married, both spouses must use the same law; one cannot use federal law while the other uses state law. See King, et al., supra, Vol. 14 at Intro-6.1 to 7; Tabb, supra, § 9.2 at 645. However, the exemption law chosen applies separately to each spouse. Thus, it is possible to double the amount of state law exemptions, Cheeseman v. Nachman, 656 F.2d 60 (4th Cir. 1981) (married couple filing a joint petition was entitled to double the Virginia homestead exemption), unless state law specifically prohibits a couple from doubling certain exemptions. See First National Bank v. Norris, 701 F.2d 902 (11th Cir. 1984); Granger v. Watson, 754 F.2d 1490 (9th Cir. 1985); but cf. In re Nygard, 55 B.R. 623 (E.D. Cal.), aff'd, 71 B.R. 779 (B.A.P. 9th Cir 985). (Professor Tabb argues that the approach of the Cheeseman court is correct, regardless of the specifics of state law regarding doubling. See Tabb, supra, § 9.16 at 690-91). Where doubling is allowed, this is another great advantage for bankrupts in particular states. (A doubling of the homestead is not permitted in Nevada. See In re Lennox, 58 B.R. 104 (D. Nev. 1986); NRS §§ 115.005, 115.020). In those 15 states where federal exemptions can still be chosen, a married couple choosing these exemptions can double the amounts available. See Tabb, supra, § 9.3 at 645. Conclusion All states have exemption laws wherein certain amounts of protected property is exempt from execution by creditors, with certain exceptions applicable. When a debtor is insolvent, the federal government has tremendous powers to collect money owed to it. This power is significantly diminished when a debtor declares bankruptcy. Furthermore, when this is so, state exemption laws can be used to shield large amounts of property from creditors, with few exceptions, which are similar to those found in state exemption laws already. Thus, depending upon the state, bankruptcy can be a formidable weapon for a debtor. Ready to Incorporate? Call NCP Today! 1-800-351-5111 And You Will Avoid Costly Mistakes!

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