What kind of property can a husband or wife protect in bankruptcy?
Both federal and state laws allow a husband or wife, living together or separated, to protect certain property from creditors. The protected property may automatically be, or can become, exempt from creditor collection process. Consequently, these laws are known as exemptions and the property is called exempt property. As explained below, a divorce can affect the property that can be protected from creditors, in or out of bankruptcy.
Bankruptcy law is concerned with both federal and state law, and the conflict between the two. The bankruptcy code itself is federal law. The bankruptcy courts are part of the federal court system, with appeals to the U.S. District Court. Family law and property law are largely state law. The bankruptcy code respects this division between federal and state law by allowing each state to provide its citizens with state law exemptions in bankruptcy, or the use of the federal bankruptcy exemptions, or the choice to use either. Those states that do not allow their citizens to use the federal bankruptcy exemptions, like the Commonwealth of Virginia, are said to have “opted out” of the federal bankruptcy exemptions contained in Section 522(d) of the Bankruptcy Code. Section 34-3.1 is the “opt-out” statute which restricts the use of the bankruptcy exemptions in Virginia.
Prior to enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) in October 2005, it was possible for a person contemplating bankruptcy to choose to reside in a state with generous exemptions, especially a state with a generous homestead exemption like Florida or Texas. The person contemplating bankruptcy could protect assets by buying an expensive home that was protected under state law.
Section 522 attempts to eliminate such forum shopping by introducing a look back period into a person’s right to claim exemptions. Domicile is a person’s legal home, where he or she permanently resides, while residence is a person’s physical location. A person’s domicile is where a person intends to reside for the indefinite future. Under Section 522(b)(3)(A), the debtor’s domicile for the 730 day period immediately preceding the filing of the bankruptcy determines the state law that applies to the debtor’s case. If the debtor has more than one domicile during the 730 day period, then the domicile which occupied the greater portion of the 180 day period prior to the 730 period will determine which state’s laws are applicable.
A husband or wife who was domiciled in Virginia during the relevant period can use various Virginia state law exemptions and certain non-bankruptcy federal exemptions, the tenancy by the entirety with the common-law right of survivorship to protect real estate, and federal bankruptcy exemptions protecting certain retirement funds, including 401(k)s and IRAs within limits. Most of the Virginia state law exemptions are contained in Title 34 of the Code of Virginia, including the homestead exemption in Section 34-4 and the poor debtor’s exemptions in Section 34-26 . A handy reference guide to the federal and Virginia exemptions is found in the official court form “Request for Hearing – Notice of Exemption Claimed” made available to judgment debtors subject to creditor process in Virginia, on the Virginia court’s website , which lists the following exemptions: Social Security benefits and Supplemental Security Income at 42 U.S.C. Section 407 ; Veteran’s benefits at 38 U.S.C. Section 5301; Federal Civil Service retirement benefits at 5 U.S.C. Section 8346 ; Annuities to survivors of federal judges at 28 U.S.C. 376(n) ; Longshoreman and Harborworkers Compensation Act at 33 U.S.C. Section 916 ; Black lung benefits at 30 U.S.C. Sections 931 and 932 ; Seaman, master, or fisherman’s wages, except for child or spousal support and maintenance at 46 U.S.C.A. Section 11109 ; Unemployment compensation benefits at Section 60.2-600 of the Code of Virginia ; portion of wages not subject to garnishment in Section 34-29 of the Virginia Code ; public assistance payments in Section 63.2-506 of the Code of Virginia ; the homestead exemption and the additional exemptions for dependents, older residents and disabled veterans at Section 34-4.1 of the Code of Virginia ; the poor debtor’s exemptions and agricultural exemptions in Section 34-27 of the Virginia Code ; worker’s compensation in Section 65.2-531 of the Code of Virginia ; growing crops in Section 8.01-489 of the Code of Virginia ; benefits from group life insurance policies in Section 38.2-3339 of the Virginia Code ; proceeds from industrial sick benefits insurance in Section 38.2-3549 ; assignments of certain salary and wages in Section 55-165 of the Code of Virginia ; pre-need funeral contracts at Section 54.1-2823 of the Virginia Code ; benefits for victims of crime at Section 19.2-368.12 of the Code of Virginia ; and certain retirement benefits at Section 34-34 .
In a family law case, you should check with a Virginia bankruptcy or family law lawyer to determine if these exemptions apply to support or alimony protected under federal law at 42 U.S.C. Section 659 . Child support owed to a parent is exempt under Virginia Code Section 20-108.1(G).
As discussed in answer to the question, “Is my real estate vulnerable to creditors when I divorce?”, a divorce terminates the survivorship in the tenancy by the entirety, exposing real property to the claims of either spouse.
You should consult with your Virginia bankruptcy attorney to determine what property will be protected if you should file bankruptcy in Virginia.