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State or Federal Exemptions – KY Bankruptcy Court Opinion

by | Jan 26, 2022 | Bankruptcy, Bankruptcy, Debt, Debt

Bankruptcy Judge Charles R. Merrill issued an opinion[1] on January 10, 2022 that proceeds from the pre-petition sale of a homestead not being exempt under the federal exemption 11 U.S.C. §522(d)(1. This provides, in relevant part, for an exemption in “the debtor’s aggregate interest, not to exceed $25,150 in value, in real property or personal property that the debtor or a dependent of the debtor uses as a residence.” In reaching this conclusion, Judge Merrill noted that that the date of filing the petition determines the debtor’s interest in real and personal property, a principal commonly referred to as the “snapshot” rule. This means a debtor may only exempt property he or she owns as of the date of filing, and there is no language in 11 U.S.C. § 522(d)(1) that would permit the exemption of the proceeds from the pre-petition sale of the debtor’s homestead. Since the debtor did not own the homestead on the date she filed bankruptcy, she could not claim an exemption under the federal exemption statute for the proceeds from the pre-petition sale of the homestead.

The debtor argued that under Kentucky exemption law, the proceeds from the transfer of exempt assets may retain their exempt status if those proceeds can be traced and identified and the proceeds were in fact traceable to the pre-petition sale of the homestead. However, as the Court noted, since the debtor chose to use the federal exemptions in her bankruptcy petition, the state exemptions are rendered inapplicable, as is any authority relied upon by debtor exclusively based in state exemption issues. This opinion highlights that individuals should carefully choose between federal and state exemptions based on which assets they desire to retain.  While some states only utilize state exemptions, Kentucky is an “opt-in” state, meaning residents can elect to choose between state and federal exemptions. In this case, if the debtor had wanted to retain her pre-petition homestead sale proceeds, she should have chosen state exemptions when she filed her bankruptcy case instead of the federal exemptions. For individuals seeking bankruptcy protection, an exemption strategy including whether to choose state or federal exemptions should be discussed with legal counsel to optimize retention of desired assets.

[1] See In re Kathy Ellen Richards, Case No. 21-40438, Doc. No. 33 (Bankr. W.D. Kentucky, Owensboro Division) January 10, 2022).

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