Source: https://www.lawbasic.com/blogs/gambling-bankruptcy-exemptions
Timestamp: 2019-04-19 21:19:38+00:00

Document:
In bankruptcy cases, individual debtors have the privilege of retaining certain amounts or types of property that otherwise would be subject to LIQUIDATION or SEIZURE by creditors in order to satisfy debts. Laws protecting these forms of property are called exemptions. Consistent with the goal of allowing the debtor a ''fresh start,'' exemptions in bankruptcy cases help ensure that the debtor, upon emerging from bankruptcy, is not destitute. Exemption statutes generally permit the debtor to keep such things as a home, a car, and personal goods like clothes. Although exemptions inhibit the creditor's ability to collect debts, they relieve the state of the burden of providing the debtor's basic needs.
The majority of states have chosen to opt out of the uniform federal exemptions, replacing them with exemptions created by their own legislatures. Homestead exemptions, which excuse all or part of the value in the debtor's home, are the most common state-mandated exemptions. These are not uniform across states. For instance, Missouri mimics the federal government by placing a dollar limit on the exemption, but at $8,000, its cap is meager in comparison (Mo. Ann. Stat. § 513.475 [Vernon 2002]). The bordering state of Iowa limits the homestead exemption by acreage rather than dollar amount (Iowa Code Ann. §§ 561.1, 561.2 [West 1992]). Florida allows a homestead exemption without limits (Fla. Const. art. X, § 4(a) (1)). This lack of uniformity raises the question of fairness: bankruptcy laws are federal in nature, yet a debtor in Florida may have a significant financial advantage over a debtor in Missouri, owing to different exemption laws.
Congress actually supports this type of pre-bankruptcy planning, permitting the debtor ''to make full use of the exemptions to which he is entitled under the law'' (S. Rep. No. 989, 95th Cong., 2d Sess. ). Still, courts view some pre-bankruptcy asset transfers as fraudulent, particularly when they involve large dollar amounts and there is evidence of intention to hinder, delay, or defraud creditors. Upon a finding of FRAUD, the bankruptcy court may deny discharge of the debtor's debts. But what constitutes a fraudulent transfer is often unclear and seemingly arbitrary.
Two bankruptcy cases from Minnesota exemplify the confusion surrounding fraudulent and nonfraudulent prebankruptcy transfers. The debtors in both cases were doctors who lost money in the same investment and who hired the same ATTORNEY to help them with their pre-bankruptcy planning. The outcomes of the cases differed significantly. Before filing for bankruptcy, Omar Tveten liquidated most of his nonexempt assets, including his home. With the proceeds, he purchased life insurance and annuities valued at almost $700,000.
Both the life insurance and the annuities were considered exempt under Minnesota law; however, the bankruptcy court held that the large amount converted was an indication of fraud and therefore refused to discharge Tveten's bankruptcy debts (Norwest Bank Nebraska v. Tveten, 848 F.2d 871 [8th Cir. 1988]).
Robert J. Johnson also transferred assets before filing for bankruptcy. Johnson converted nonexempt property into property exempt under Minnesota law: he purchased $8,000 in musical instruments, $4,000 in life insurance, and $250,000 in annuities from fraternal organizations, and he retired (paid off) $175,000 of the debt on his $285,000 home. The court focused on Johnson's claim for homestead exemption and in particular on the $175,000 MORTGAGE payment made just before filing for bankruptcy. As the court in Tveten demonstrated, an unusually large asset transfer can indicate fraud. But in Johnson, the court held that the homestead exemption was valid, stating that the value of an asset transfer to homestead property, unlike the value of an asset transfer to property in another exemption category, is of little relevance because ''no exemption is more central to the legitimate aims of state lawmakers than a homestead exemption'' (Panuska v. Johnson, 880 F.2d 78 [8th Cir. 1989]). Legal commentators have criticized the Tveten and Johnson decisions as being arbitrary and as providing no clear lines to assist debtors in pre-bankruptcy planning.
Critics charge that the different outcomes are simply a result of different judges presiding at the initial bankruptcy court level, because the facts of the cases were so similar. Bankruptcy attorneys are frustrated by a lack of uniformity among court decisions that apply similar principles but reach different results, and also a lack of uniformity in exemption laws among states.
Indeed, forum shopping (searching for the most advantageous jurisdiction in which to file bankruptcy) is prevalent because of the wide diversity of state exemption laws. In re Coplan, 156 B.R. 88 (Bankr. M.D. Fla. 1993), illustrates the problem. The debtors, Lee Coplan and Rebecca Coplan, incurred substantial debt in their home state of Wisconsin before moving to Florida. After residing in Florida for one year and purchasing a house for $228,000, they sought bankruptcy relief and a homestead exemption under Florida law(West's F.S.A.Const.Art. 10, § 4(a)(1)), which allows an exemption for the full value of the homestead. The court found that the Coplans had engaged in a systematic conversion of assets by selling their home in Wisconsin and paying cash for their new home in Florida. This action was conducted, according to the court, solely for the purpose of placing the assets out of the reach of creditors. As a result, the bankruptcy court in Florida allowed a homestead exemption of only $40,000, the extent provided by Wisconsin law (W.S.A. § 815.20(1)). Yet other bankruptcy decisions have held that a conversion of nonexempt property to exempt property for the purpose of placing such property out of reach of creditors will not alone deprive the debtor of the exemption (see, e.g., In re Levine, 139 B.R. 551 [Bankr. M.D. Fla. 1992]).

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