Which Debtors Qualify for Application of the Kentucky Exemption Laws and Can They Now Elect Federal Exemptions?

June 14, 2005

Frost Brown Todd LLC

Many times, the pressing questions in a bankruptcy proceeding concern what property will be protected through exemptions. With recent amendments to the Bankruptcy Code (the “Code”) and a major shift in the Kentucky Revised Statutes, debtors now have different issues to consider when determining the applicable exemptions. This advisory is intended to assist our clients in dealing with the new amendments.

According to the amended § 522(b)(3) of the Code, the applicable exemptions for any particular debtor are determined by the law of the state where the debtor has been domiciled for the previous 730 days.[1] If the debtor has been domiciled in more than one state in the previous 730 days, then the laws of the state where the debtor was domiciled for the 180 days prior to the 730-day period apply. The 730-day period of amended § 522(b)(3) is a stark change from the previous 180-day period[2]for determining applicable law. In the past, a debtor could engage in significant bankruptcy planning by moving to a favorable state a mere 180 days prior to filing for bankruptcy in order to have that state’s advantageous law apply. Now, under the new provisions, the debtor must have been a domiciliary for 730 days in a state in order to apply that state’s favorable laws.

If the debtor qualifies to apply Kentucky law, a recent, interesting change to Kentucky law is relevant. Historically, K.R.S. § 427.170 stated that only Kentucky’s statutory exemptions applied and the federal exemptions of Code § 522(d) could not be asserted by Kentucky debtors.[3] However, with the passage of amendment to K.R.S. § 427.170 in March of 2005, debtors who meet the domiciliary requirements of § 522(b)(3) of the Code, and therefore qualify for application of Kentucky law, may choose between the federal exemptions and the Kentucky exemptions.[4] The text of the statute says that the “debtor domiciled in this state is authorized to exempt from” the estate that property exempted under federal law.[5] The new statute does not explicitly require debtors to elect between only federal or state exemptions, and, therefore, debtors might arguably be able to elect favorable exemptions from both the federal and state provisions. This interpretation will most likely have to be tested before the courts.

State Representatives Bill Farmer, Robin Webb, and Jim Wayne sponsored House Bill 248, which included, among other things, the amendment to K.R.S. § 427.170.[6] State law originally precluded the application of the federal homestead exemption and instead required Kentucky debtors to utilize a Kentucky homestead exemption of $5,000 per debtor.[7] Representatives Farmer, Webb, and Wayne initially intended to merely increase the size of the exemption to $25,000.[8] But after further review, they decided that allowing the debtor to opt into the federal exemptions was the more prudent decision because of the adjustable nature of the federal homestead exemption.[9] Although Rep. Farmer asserts that the purpose of the Bill was primarily to allow Kentucky debtors to capitalize on the adjustable federal homestead exemption,[10]debtors are also able to utilize any other exemptions in 11 U.S.C. § 522(d).[11]

In summary, by requiring a 730 day residence, the amendments to the Bankruptcy Code now make it much harder for an individual to qualify for a certain state’s exemption statutes. However, if a debtor does qualify for use of Kentucky exemptions, they also have the option of electing to apply federal exemptions as well.

If you have any questions regarding this advisory or the new amendments to the Bankruptcy Code, please contact any of the Financial Restructuring Group attorneys located in our Louisville or Lexington office.

[1]Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 11 U.S.C. § 522(b)(3)(A) (2005).

[2] 11 U.S.C. § 522(b)(2)(A)(2000), amended by 11 U.S.C. § 522(b)(3)(A) (2005).

[3] Ky. Rev. Stat. Ann. § 427.170(1980), amended by Ky. Rev. Stat. Ann. § 427.170 (2005).

[4]Ky. Rev. Stat. Ann. § 427.170 (2005).

[5]Id.

[6]Ky. H.B. 248 (2005).

[7]Ky. Rev. Stat. Ann. § 379.080 (1980), amended by Ky. Rev. Stat. Ann. § 379.080 (2005).

[8]Telephone interview with Bill Farmer, Kentucky Representative for the 88th District (May 24, 2005).

[9]Id.

[10]Id.

[11]11 U.S.C. § 522(d).

Additional Documents:

• financial_restruct_ky_exempt_laws_06142005