If the time has come to take a big step to get debt relief, you may be thinking about filing for bankruptcy. There is really nothing quite like a federal filing to almost instantaneously get rid of the debt that has been a burden to you, but as with most government dealings, there are many rules and regulations to know about. One of those rules that is fairly new is the residence requirement. Read on to learn more about why the place you've lived affects your state of filing.
The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA)
The bankruptcy codes underwent a big overhaul several years ago, which were the first changes in some time. The 2005 act resulted in some momentous changes in the codes that, in spite of the name, mostly protected creditors from consumers. The act's primary purpose was to tighten up the requirements for filing and to prevent people from taking advantage of bankruptcy to shed debt and build wealth. Among other changes were mandatory financial classes for the filer, the need to prove your financial problems through the creation of a budget, residency requirements, and placing income limits on filers.
Why Does Residency Matter?
While it's true that bankruptcy is a federal matter, each state has a say about exemptions. An exemption is a powerful tool that allows consumers to remove some of the value of a given piece of property in an effort to keep that piece of property. Chapter 7 bankruptcy allows the courts to seize property, like homes and cars, to sell that property and to use those proceeds to pay the creditors.
Take this example: Your home is appraised at $300,000 but you owe $250,000. If you are filing jointly you might have a homestead exemption of $50,000. That means you can keep your home since it would not be worth anything to the bankruptcy courts once they repay the lender. The total amount of your bankruptcy also matters since the home equity would need to exceed or equal the total amount of debt owed before it was seized.
Also known as "forum shopping," this method of using the state that has the most generous exemptions was rampant before the BAPCPA was passed. Now, you must show that you have been a resident of the state for at least 2 years before you can use the exemptions in that state.
There are some special rules for residents who have established residency for at least 180 days as well, so speak to a bankruptcy attorney, such as McElrath Law, to learn more.