Oregon joins the minority of states allowing residents the option of federal exemptions to protect their assets when filing bankruptcy.
Exemptions Are Very Important
One of the crucial considerations in bankruptcy is whether all of your assets are “exempt,” or protected by the law from your creditors.
If all your assets are exempt, then you can keep everything that you own if you file a Chapter 7 “straight bankruptcy.” Whether your assets are exempt also affects how much you would pay to your creditors and how long you would do so if you file a Chapter 13 “adjustment of debts” case. This consideration can also greatly influence which of these two options are better for you.
Assets Protected by the Law? Which—State or Federal Law?
The first sentence above refers to exempt assets as those that are “protected by law.” For the last 33 years the “law” has meant Oregon state law and the exemptions provided there.
But bankruptcy is federal law, so how can state law have such an effect on one of the most basic aspects of bankruptcy law?
That’s because of one of the most important compromises in the history of bankruptcy in America. Throughout the 1800s most of the time there was no federal bankruptcy law on the books at all, in large part because of deep conflicts between different regions of the country—mostly the big creditors in the old financial centers of the northeast against the debtor farmers and small merchants of the south and west. That conflict played out within this issue of exemptions, becoming a fight between states’ rights and federal power—the states’ ability to enforce their own exemption statutes within its borders versus the federal constitutional right “to establish . . . uniform laws on the subject of bankruptcies throughout the United States.” (Article 1, Section 8, Clause 4.)
This tension was still very much alive during the last total overhaul of the bankruptcy laws, which was passed in 1978 and became effective the following year. In it a compromise was struck between using a federal set of exemptions vs. the states’ exemptions. (The states all have a set of exemptions for the purpose of deciding which of their residents’ assets should be protected in general debt collection matters, which is accepted to be within the scope of states’ powers.)
In this compromise, Congress decided, first, that each state’s residents could use the exemption laws of that state when filing bankruptcy in that state. And second, each state had the ability to “opt-out” of allowing its residents to use a set of federal exemptions instead of that state’s exemptions. So, to make this clear, each state was authorized either to give their residents a choice between its exemptions or the federal ones, or to require them to use the state’s exemptions. (Note that nobody was forced to use the federal exemptions, meaning that this was quite a victory for the states’ rights side.)
Oregon Quickly Opted Out of the Federal Exemptions
In 1981—the first time the Oregon Legislature met in a regular session after the new bankruptcy law went into effect—it passed a law whose meaning is clear from its section title and plain language:
Resident not entitled to federal bankruptcy exemptions.
[R]esidents of this state shall not be entitled to the federal exemptions provided in . . . the Bankruptcy Code of 1978 . . . .
(ORS 18.300, effective through June 30, 2013; formerly ORS 23.305.)
That has been the law ever since. That is, until July 1, 2013.
After 32 Years, Oregonians Can Now Use the Federal Exemptions
Now Oregon has joined the minority of states which allow the use of the federal OR state option. the first sentence of the new ORS 18.300 states the following, also quite plainly:
For purposes of a bankruptcy petition, a resident of this state may use the federal exemptions . . . of the Bankruptcy Code of 1978 . . . or the exemptions given to residents of this state under state law, but may not use both.
So, for bankruptcy cases filed as of July 1, debtors can use the federal or Oregon set of exemptions, whichever is better for them.
What Difference Does It Make?
In comparing the federal and Oregon exemptions, each has strengths and weaknesses. In a number of ways these two schemes are quite different—like comparing apples and oranges. Which one is better truly depends on each person’s unique set of assets. It can also depend on other seemingly irrelevant factors like whether you are filing by yourself or with a spouse, and whether or not you own a home.
However, there is no question that there will be many people who will be significantly helped by this new availability of the federal exemptions. More people will be able to file bankruptcy in Oregon without worrying about losing any assets to their creditors (through the bankruptcy trustees). More people may be able to file the simpler Chapter 7 “straight bankruptcy” instead of the multi-year Chapter 13 “adjustment of debts,” which can be a good tool to preserve assets that would otherwise be lost in a Chapter 7 case. Chapter 13 will still have that purpose (and countless others), but may not be needed as often.
In the next few blog posts we will demonstrate some of the most important advantages of this new law.