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Law Review: Ponoroff, Lawrence - Constitutional Limitations on State-Enacted Bankruptcy Exemption Legislation and the Long Overdue Case for Uniformity

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By Ed Boltz, 13 April, 2014
Abstract:  The division of responsibility between state and federal authorities in bankruptcy is complex. The U.S. Constitution cedes the power to pass bankruptcy laws to the federal government. For political reasons, however, since 1867 the federal bankruptcy law has deferred to one degree or another to the states with respect to the designation of property exempt from administration in a bankruptcy case. The constitutionality of this practice under the uniformity requirement in the Bankruptcy Clause of the Constitution has been settled since 1902. More recently, however, considerable disagreement has arisen in the case law over whether this deference extends to exemptions enacted by a state that apply solely in bankruptcy. In this article, the author examines the constitutionality of such exemptions under both the Bankruptcy and the Supremacy Clauses. He concludes that serious questions exist on both counts given the potential of such exemptions, respectively, to undermine the uniform application of core bankruptcy policy and frustrate the full attainment of the goals of the bankruptcy system. At the same time, however, the author notes that the growth in the prevalence of such exemptions, coupled with other contemporary social and economic developments, suggest that the political considerations that for so long accounted for the use of state exemptions in bankruptcy cases may have abated to the point that the issue can be most efficaciously resolved by federalizing bankruptcy exemptions — an approach near-unanimously urged by congressional commissions and commentators for over forty years as far superior to the present system. Commentary: The call by this paper to revive the recommendations of past bankruptcy commissions to establish uniform federal bankruptcy exemptions, while well-meaning, in that it hopes that such uniform federal bankruptcy exemptions would be moderate and improve over many the paltry exemptions in many states, is problematic on many fronts. First, it does not recognize the general gridlock in Congress that would prevent any legislation or the lingering residue of BAPCPA, which indicates that when Congress does enact bankruptcy legislation, it does so sloppily and in a manner that is only coherent in its hostility to debtors. Second, such uniform federal bankruptcy exemptions would be difficult to craft. For example, the reasonable homestead in California is going to be dramatically different than one in North Carolina. Further, assets of importance for a fresh start can vary geographically and culturally, making the allowance of some federalism and state choice important. Lastly, even with uniform federal bankruptcy exemptions, different state exemptions would still exist for the collection of judgments. This would surely be true for collections of judgments obtained in state courts, but what of federal court judgments? The goal of uniformity would seem both illusory and unattainable. For a copy of the article, please see: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2421632

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