STATE HOMESTEAD EXEMPTIONS AND THEIR EFFECT ON FEDERAL BANKRUPTCY LAWS

Real Property, Probate and Trust Journal, Spring 2004 by Rivera, Ryan P

Part III of this Article will dissect recent proposals to amend the federal exemption and produce uniform treatment of the homestead exemption in federal bankruptcy proceedings. Since 1994, Congress has proposed amendments to the federal exemption in an effort to create a uniform dollar limitation on the exemption that would apply to debtors in every state. However, the proposed amendments have been unsuccessful and our current scheme remains devoid of uniformity. Part III concludes with an alternative proposal that will minimize the incentive for individuals to relocate in a state with a generous exemption before filing for bankruptcy.

II. STATE HOMESTEAD EXEMPTIONS

"Although bankruptcy is federal law the rights in bankruptcy of debtors and creditors are governed in large part by rights under applicable state law."21 Therefore, to understand federal bankruptcy law and the treatment of the homestead exemption in federal bankruptcy proceedings, first it is important to consider the history and development of state homestead laws.

Homestead legislation appears to be a uniquely American contribution to the law of real property. The origins of homestead legislation can be traced to a statute of the Republic of Texas enacted in 1839.23 While many states have embraced similar policies, such as liberally construing state statutes in the debtor's favor, our current system has produced inconsistent treatment of state homestead exemptions in federal bankruptcy proceedings.24 Most states have imposed some type of dollar limitation upon the property being claimed as a homestead. An acreage restriction often accompanies the dollar limitation, which may vary considerably depending on whether the homestead is urban or rural.25

A. State Homestead Exemptions: The Nineteenth Century

State homestead exemptions emerged in the mid-nineteenth century when states were embracing the policy that holders of a possessory interest in land should receive at least marginal protection from their creditors.26 The first state homestead exemptions provided debtors with absolute necessities, such as bedding, clothing, and tools of the trade.27 But after the economic depressions during the eighteenth and nineteenth centuries, many state legislatures began granting more extensive exemptions-excluding even more assets from creditors than were covered by the early exemptions.28 During the mid to late-nineteenth century, the primary policy behind most state homestead statutes was to protect certain real property of the debtor, thereby preserving the home for the family.29 By 1874, twenty-five states had adopted homestead laws.30 Nine of these state homestead laws were constitutional provisions and the remaining homestead exemptions were legislative.31 Distinguishing between constitutional and statutory provisions was important during the nineteenth century and remains important today. Reforming constitutional provisions is a burdensome process that is substantially more difficult than promulgating new statutory law.32