Arizona District Court Addresses Eligibility for Exemptions

Posted by NCBRC - June 9, 2021

Where the Arizona debtors were subject to Kansas exemption law but could not actually take any exemptions due to residency requirements, they were entitled to use federal exemptions under section 522(d). Mackenzie v. Schreiber (In the Matter of Schreiber), No. 20-1993 (D. Ariz. June 4, 2021).

After living in Kansas for fourteen years, the debtors moved to Arizona where, one month later, they filed for chapter 7 bankruptcy. Maintaining that they were not eligible for either Arizona or Kansas exemptions, they claimed federal exemptions under the hanging paragraph of section 522(b)(3)(A) and section 522(d). The trustee objected, arguing that they were eligible for Kansas exemptions and were therefore precluded from taking the federal exemptions. The bankruptcy court overruled the objection, and the trustee appealed to the district court.

The domiciliary requirement set forth in section 522(b)(3)(A) provides that debtors may claim exemptions from any state where they have lived for 730 days preceding the bankruptcy petition, or, in the absence of such place, for the 180 days immediately preceding the 730-day period. The hanging paragraph to that section provides that if debtors are rendered “ineligible for any exemption” due to the residency requirement, they may elect to exempt property under section 522(d).

In this case, the debtors lived in Kansas for the 180 days preceding the 730-day residency period and therefore qualified for Kansas exemptions under section 522(b)(3)(A). However, Kansas imposes its own residency requirements on homestead and personal exemptions and, due to those restrictions, the debtors could not claim any exemptions under Kansas law.

On appeal, the case turned on interpretation of the phrase “ineligible for any exemption.” The trustee argued that so long as the debtors are not affirmatively barred from use of the Kansas exemptions, they are “eligible” and cannot use the federal exemptions. The debtors argued that they must actually possess and be able to exempt property under the laws to be deemed eligible.

The court looked to Black’s Law Dictionary which defines “eligible” as “fit and proper… to receive a benefit.” The court reasoned that debtors “are not ‘fit and proper’ to claim an exemption unless they possess the assets subject to the exemption.” The court further found that the purpose behind the hanging paragraph is to ensure that debtors have access to some exemptions if they cannot use those of the state.

The trustee argued that, under Kansas law, the debtors could exempt their mobile home even though it was located in Arizona. The court disagreed finding that, while Kansas does not explicitly state that homestead property must be located in Kansas, courts have held that the homestead exemption does not have extraterritorial effect. The court rejected the trustee’s argument that the caselaw it relied on was obsolete because it pre-dated BAPCPA. Rather, the court found that there were no post-BAPCPA cases supporting the trustee’s position and therefore its reliance on the pre-BAPCPA cases was appropriate.

Likewise, the court found Kansas’s personal property exemptions had no force outside of Kansas and were therefore unavailable to the debtors. To the extent there were some personal property exemptions that did not have explicit residency requirements, the debtors did not possess the assets. The court found that “[a] debtor’s ability to claim exemptions under Section 522(d) hinges on whether he can actually claim exemptions under state law.”

The court affirmed.

Schreiber D Ariz June 2021



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