A second look at the proposed uniform bankruptcy exemptions: Tennessee as an example

University of Memphis Law Review, The, Spring 1998 by Brown, William Houston, Ponoroff, Lawrence

THE HONORABLE WILLIAM HOUSTON BROWN*

LAWRENCE PONOROFF**

The National Bankruptcy Review Commission (Commission), which was created by Congress,1 reported its recommendations for changes to the Bankruptcy Code2 to Congress in a written report issued on October 20, 1997.3 Of the 170 recommendations, the Commission proposed that the exemptions allowable to debtors in bankruptcy be changed in several significant respects. Most importantly, the Commission advocates the wholesale elimination of the use of state law personal property and income exemptions in bankruptcy and the restriction of state homestead exemptions within a federally imposed floor and ceiling. This Essay discusses the Commission's exemption recommendations, illustrates the effect of those recommendations, should they be adopted by Congress, and compares the recommendations to the current use of Tennessee's exemptions in bankruptcy by debtors who are domiciled in Tennessee when they file for bankruptcy relief.4

We have each published articles that advocate a recommendation by the Commission for the abolishment of the current portion of the Bankruptcy Code that permits a state legislature to "Opt-ol lt" of the bankruptcy exemptions.5 This provision requires debtors who are subject to such a state's laws to use that state'" exemptions in bankruptcy in lieu of the option to elect the current federal bankruptcy exemptions contained in (sec)522(d) c tf the Bankruptcy Code. Moreover, in our prior articles and i In testimony before the Commission, we advocated that the exemptions allowable in bankruptcy should be more uniform, ir fact as well as in theory, in order to better serve the bankniptcy exemption and "fresh start" policies.6 These policies involve "issues of debtor relief and rehabilitation that transcend ,whatever social, historical, or cultural factors account for exemption schema in the several states."7 In the sensitive balance that the consumer bankruptcy system seeks to strike between de debtor protection and creditor rights, this proposal is "neutral." that is to say, on the one hand, it is intended to and would price the fresh start for debtors residing in states whose exemptions promulgated with a view toward judgment execution rather than bankruptcy policy, are unreasonably meager. On the other hand, it would also ensure that debtors who reside in (or relocate to) states whose exemptions are unusually generous, sometimes infinite, would no longer be able to exploit those exemptions to deprive their creditors of a fair return on their claim while obtaining a complete discharge from debts in bankruptcy.8 The limitations of this Essay do not permit a restatement of the issues or positions taken in our earlier articles. Nor does this Essay attempt to review the numerous positions that have been staked out in the periodic literature either supporting or disagreeing with the position herein espoused.9

I. THE CURRENT BANKRUPTCY EXEMPTION SCHEME

The Bankruptcy Code currently permits a debtor to choose between the federal bankruptcy exemptions described in (sec)522(d) of the Code and the federal nonbankruptcy exemptions10 coupled with the debtor's domiciliary state law exemptions.11 That choice, however, is restricted by the portion of the Code popularly known as the opt-out,12 under which Congress-in what was essentially a political compromise necessary to achieve passage of the Bankruptcy Reform Act of 1978-permitted state legislatures to restrict bankruptcy debtors to the use of state law, rather than federal bankruptcy, exemptions.13 In the event a bankruptcy debtor is permitted by the domiciliary state to choose the federal bankruptcy exemptions, a specific list of allowable exemptions with monetary limitations is found in the Bankruptcy Code.14 If, on the other hand, the state legislature in a debtor's domicile has opted out of the bankruptcy exemptions, that debtor must look principally to the specific exemptions found in that state's constitution or statutes, as well as to the federal nonbankruptcy exemptions.

The variation among states' elections under their opt-out authority necessarily leads to the reality that bankruptcy debtors in an opt-out state, such as Tennessee,15 will not have the same choices of exemptions that are available to debtors in a state that did not opt-out of the bankruptcy exemptions.16 Moreover, even among opt-out jurisdictions, there is enormous variation in the states' respective exemption schema.17 This lack of literal uniformity in application of exemption laws has caused some to question whether the opt-out provision passes muster under the Constitution's lodging of exclusive authority in Congress "[t]o establish . . . uniform Laws on the subject of Bankruptcies throughout the United States."18 Despite such concerns, under authority of the Supreme Court's interpretation of the use of state law exemptions under the Bankruptcy Act of 1898,19 other courts, including the Court of Appeals for the Sixth Circuit, have construed the opt-out as constitutional.20