Code 522p of the Bankruptcy laws May be Unconstitutional

Seal of the United States bankruptcy court. Ch...

Seal of the United States bankruptcy court. Church of Scientology attorney Steven Hayes bought rights to the Cult Awareness Network assets during its bankruptcy proceedings. (Photo credit: Wikipedia)

Bankruptcy laws were changed in 2005 that has greatly affected the homestead provision in state laws. Some are saying that code 522 (p) of the bankruptcy laws may be unconstitutional.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was passed by Congress because of perceived serial abuse by bankruptcy filers. The legislative action covered broad spans of the bankruptcy laws in hopes of eliminating abuses and protecting consumers who are forced into having to file for bankruptcy. The new bankruptcy laws have done little to accomplish the latter, and if anything, many feel the laws have been cumbersome and confusing in what little they do to stop abuses.

One such confusion is found in the Bankruptcy Code 522 (p) that reads:

(p)(1) Except as provided in paragraph (2) of this subsection and sections 544 and 548, as a result of electing under subsection (b)(3)(A) to exempt property under State or local law, a debtor may not exempt any amount of interest that was acquired by the debtor during the 1215-day period preceding the date of the filing of the petition that exceeds in the aggregate $146,450 [as adjusted 4-1-10, every 3 years by section 104.] in value in–

(A) real or personal property that the debtor or a dependent of the debtor uses as a residence;
(B) a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence;
(C) a burial plot for the debtor or a dependent of the debtor; or
(D) real or personal property that the debtor or dependent of the debtor claims as a homestead.

(2)….
(B) For purposes of paragraph (1), any amount of such interest does not include any interest transferred from a debtor’s previous principal residence (which was acquired prior to the beginning of such 1215-day period) into the debtor’s current principal residence, if the debtor’s previous and current residences are located in the same State.

The confusion concerning this Code comes about for people moving from one state to the next. For instance, if you move from Florida to Texas and you file for bankruptcy inside of the 1215 day period, you can stand to lose your home if your new home has more than the $146,450 in equity. Both Florida and Texas state exemption laws allow unlimited equity in ownership for an exemption of your homestead. That means you can be penalized simply because you made a mover across the country and out of your state.

According to section (2) of the law, a person moving within a state during this time will not be penalized and can exempt the full amount the state law allows. So a person is penalized for moving out of state. This law, then, becomes a constitutional problem because it inhibits the non-enumerated but generally accepted right to interstate travel under the Fifth Amendment’s Due Process Clause. A person forfeits his unlimited exemption under each state’s laws just because he was an inter-state mover, thus possibly inhibiting a person’s right to travel across the United States with the intent of living elsewhere.

It will be interesting to see who will constitutionally challenge Rule 22 (p) of the bankruptcy law under this premise. It probably won’t be anyone filing for bankruptcy, though, because they won’t be able to afford the cost of the lawsuit. Bankruptcy lawyers?

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