Reference -
Bankruptcy Code Acknowledges the
Validity of the Homestead Exemption
Many times the subject of bankruptcy seems baffling in its
complexity. Actually the basic principals of bankruptcy are fairly
simple even though the federal statuses on bankruptcy are extensive. The
reason that the statutes are so complex is because in as effort at
social engineering, the lawmakers want to cover every possible
contingency. The very complexity of the Bankruptcy Code gives the
lawyers ample opportunity to try to obtain interpretation of the law
which best serves their clients interest. This results in extensive
litigation and occasionally in interpretations of the Code which were
not what legislature intended. This on turn results in additional
legislation, which results in additional litigation and on and on.
Nevertheless, the underlying principals are not as complex as the Code
makes them seem. Here we will discuss the personal nature of bankruptcy.
The concept of bankruptcy is an old one in the English common law. If
a person could not pay his debts, his creditors hauled him into court,
took all of his assets, and used those assets to satisfy their debts. If
the assets were insufficient to satisfy the debts, the debtor was taken
from the bankruptcy court to debtors' prison. Since this is a rather
extreme remedy, Article 1 Section 8 of the U.S. Constitution gives the
Congress the right to establish "?.uniform Laws on the subject of
Bankruptcies throughout the United States."
As the popularity of debtors' prison declined, the concept of giving
the debtor a fresh start became one of the primary purposes of the
bankruptcy process. It is important to remember that a bankruptcy is a
personal action which at time of discharge gives the petitioner
(formerly the debtor) a fresh start. The property owned by the
petitioner does not get the fresh start, the individual does.
The fact that bankruptcy is a personal action may shed some light on
the effect of a homestead exemption in a bankruptcy proceeding. The
bankruptcy code acknowledges the validity of homestead exemption. A
homestead exemption is a personal exemption which, in an effort to
preserve a person's home, protects a certain amount of an individual's
equity in the homestead property. State law determines the extent and
effect of a homestead exemption. Thus, if state law says that a person
can declare a homestead up to $45,000 and if there is less than $45,000
equity in the property, that equity in the property is protected by the
homestead exemption. This principal operates without regard to the
Federal Bankruptcy Code.
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