Exemptions Act, Model Summary

Bankruptcy is, by the U. S. Constitution, a matter for federal law under the explicit powers of Congress. Even under the mandate for uniform bankruptcy laws, Congress has left the question of exempt property to state law. Exempt property is that property which may not be disposed of in a bankruptcy proceeding. It is immune from creditors. Because of the diverse interests represented in the states, the exemption provisions in state law have been anything but uniform. The statutes present a jumbled mosaic which now presents a problem in the administration of bankruptcies.

It is clear that Congress could establish a federal exemp­tions act. The power to provide for uniform bankruptcy laws would clearly authorize such a move. Indeed, in 1973, the Commission on Bankruptcy Laws recommended that Congress take action. Since 1973, bills have been pending in Congress. Unless the states take steps to resolve their problems with exemptions, the likelihood of fed­eral preemption is very high.

In order for the states to retain their current prerogatives, they need a cogent draft of reasonable exemptions. The Uniform Exemptions· Act provides that draft. What is needed is a draft to utilize the traditional exemptions, but creating a fair and coherent pattern from them. This, indeed, was the recom­mendation by the Commission for federal law. The Uniform Act now permits this by state law.

The theory of exemptions is simple. A bankruptcy is a pro­ceeding to terminate indebtedness and to satisfy creditors insofar as the debtor's assets are able to satisfy them. After bankruptcy, the debtor's record is clear. It is a draconian procedure, de­signed to be used only when a debtor's financial condition is so bad that creditors will never have a chance at any other reasonable satisfaction.

The law provides for the dissolution of the debtor's assets. However, it also must provide for his basic survival after the dissolution. That is what exemptions are for, survival after bankruptcy. The Uniform' Act establishes a basic category of exemptions which would reasonably be expected to provide for the debtor's continuance and that of his family, after the bankruptcy. The categories are eight in number: homestead, special property, support maintenance property, life insurance and endowments, tools, motor vehicle, liquid assets, and personal items. In each category, certain items of property are exempted from the bankruptcy proceeding.

The homestead exemption provides for an interest in property used as a home up to a value of $10,000.00. Jointly held property may receive a total exemption of $20,000.00. The nature of the interest is not determinative, so long as use for a home is in­volved. Thus, a cooperative apartment or a mobile home qualifies. The homestead exemption is designed to keep a place to live for the debtor and his family. The value placed upon it in the Uniform Act assures it, whether it covers the actual value of an existing residence or provides cash to make a new beginning in the event the existing residence must be sold in the bankruptcy proceeding.

Certain kinds of property or income for special purposes are exempted. Examples are a family burial plot and health aids reas­onably necessary for the individual to work or sustain health. Certain kinds of income, such as unemployment compensation, welfare payments, medical and veteran's benefits, are exempt. These are property and sources of income largely provided for immediate family survival and to overcome the impact of some catastrophe. These types of property and income are, therefore, not subject to the bankruptcy proceeding.

Closely related are property and income specifically for support and maintenance. Included are disability payments, alimony and separate maintenance payments, insurance proceeds, death bene­fits, and annuities. Here, again, the property or funds are de­signed for survival of the family, and should be immune from the bankruptcy proceeding.

Unmatured insurance contracts also fall into the same cate­gory. However, accrued dividends and loan value may be paid to creditors in excess of the first $1,500.00. Insurance is, again, a usual means of protecting a family.

Certain items of personal property also may be exempted. Household furnishings and wearing apparel are paramount. Family heirlooms are included. No item is protected, however, beyond an initial $500.00 value. There is a jewelry exemption of up to $750.00. Tools of a trade and professional books can be retained to a value not exceeding $1,000.00. A motor vehicle can be re­tained to an extent of value not exceeding $1,500.00. There is a liquid assets exemption of $500.00, if a homestead exemption is claimed, or $1,500.00 if it is not. These are provisions to exempt the personal family items which will assist to maintain it after disposal of all non-exempt assets.

There are provisions in the Uniform Exemptions Act for tracing exempt property and proceeds from exempt property. There are provisions for other incidents of dealing with exempt property and with levying the property of a bankrupt. The Uniform Exemp­tions Act presents a reasonable draft of exemptions designed to provide for family and individual survival after bankruptcy. As a replacement for the chaotic mosaic now existing, it will pro­mote better handling of the entire bankruptcy problem.