An Afternoon in Richmond. Or, My Statement on Virginia HB 2015

Subsequent to my post about HB 2015 here, I was asked to testify before a subcommittee of the Courts of Justice committee of the Virginia House of Delegates. HB 2015 modifies two of Virginia's poor debtor's exemptions, creates two more, and would have permitted Virginia residents who file bankruptcy to claim either federal or state exemptions. The subcommittee forwarded the bill to the full committee after removing the option to permit either state or federal exemptions. 

HB 2015 was the final bill of the day to be considered by the subcommittee. Thus, my testimony was limited to five minutes. Subcommittee chair Greg Habeeb, who struck me as an excellent example of an iron fist in a velvet glove, wanted me to speak to only one issue: the repeal of Virginia's opt-out of the federal bankruptcy exemptions. You can read about the convoluted state of affairs that Congress created when it amended the Bankruptcy Code in 2005 in my full statement below. I did my best to explain it in five minutes but the subcommittee remained unconvinced.

When all was said and done, matters ended where I had expected. The subcommittee was expressed its concern for fair treatment of poor Virginians but was unwilling to give up the discretion afforded the states by Congress. A satisfactory result in my opinion.

Following is my prepared statement.

Statement of C. Scott Pryor

Professor

Regent University School of Law

Concerning HB 2015

For the Civil Subcommittee of the Courts of Justice Committee of the House of Delegates of the Commonwealth of Virginia

26 January 2015

Dear Subcommittee Members:

I have served as a professor of law at the Regent University School of law since the fall of 1998. During my time at Regent I have taught bankruptcy law many times. During the spring of 2013 I was honored to serve as Resident Scholar at the American Bankruptcy Institute in Alexandria, Virginia. Prior to starting my academic career, I practiced law for over fifteen years primarily in the field of creditors’ rights and insolvency. My clients included lenders, business creditors, and, occasionally, debtors.

If you have ever seen a cartoon of a skinny little guy who is broke and wearing only a barrel, you may have wondered why the creditors left the barrel. In fact, the law of every state makes at least some property exempt from execution and other legal process so that no debtor can be reduced to absolute destitution.[1]

There are three sorts of reasons why a modern state wishes to avoid results that threaten the social fabric of the community: viability, utility, and dignity. The first, viability, is demonstrated by laws designed to prevent a creditor from leaving a debtor with so little property that the debtor and the debtor’s family will become a charge on the community. From maintenance of poorhouses in the eighteenth century to modern welfare programs, poverty imposes costs on the broader community. In colonial times tithes but today taxes are collected to permit the survival of the worst-off members of a political community. Even if exemption laws leave some creditors with less than their potential maximum recovery, that is a price creditors should be willing to pay for participating in a functioning political and economic system.

The second sort of reasons for exemption laws has to do with permitting a debtor to retain assets necessary for a fresh start. Clothes, farm equipment, tools of the trade, automobiles, and the like are the sorts of assets necessary for a debtor to become a productive member of the community again.[2] Not only are such assets useful in permitting a debtor to support him or herself and his or her dependents, they permit the debtor to become sufficiently successful to pay taxes, which, in turn, is of value to the entire polity including its members who are creditors.[3]

Finally, some property is so closely associated with a debtor’s person and of so little value to a creditor that the dignity of a debtor created in God’s image demands that this property be protected from creditor claims. Items such as clothes, which have little monetary value for a creditor but are crucial to a debtor or a family Bible, which is tangible evidence of the continuity of a debtor in a family, are examples of exemptions grounded in a debtor’s dignity.[4]

HB 2015 would modify two of Virginia’s current poor debtor’s exemptions and add two exemptions. It would also permit Virginia debtors in a federal bankruptcy proceeding to avail themselves of Virginia or federal exemptions.

Modifications and Additions

The two modifications to Virginia’s current poor debtor’s exemptions are relatively minor. Rather than being able to exempt a single firearm worth up to $3,000, a debtor would be able to claim as exempt any number of firearms so long as their cumulative value did not exceed $3,000. This modification would protect the typical gun owner who has a hunting rifle, another small caliber rifle used for target practice, a shotgun, and a sidearm, none of which are likely to be worth more than several hundred dollars. As the law now stands, a debtor can protect cash of $3,000 by buying an expensive firearm immediately before bankruptcy, claim it as exempt, and then sell it for $3,000 cash after the bankruptcy case is closed. Reasons of utility—including self-protection—warrant a modification to permit Virginia debtors to keep all their firearms under a reasonable dollar cap.

A similar rationale supports modifying the exemption for equity in one automobile to more than one so long as the total value of the cars (above any debt secured by a lien on them) does not exceed $6,000. In most communities today, two parents, one or both of whom work outside the home, need two cars not only to commute to and from work but also to take children to day care centers, school events, doctor’s appointments, Boy or Girl Scouts, and the like. Reasons of utility and dignity of the family unit warrant this modification.

The viability of the family unit warrants the two additional exemptions in HB 2015. Funds remitted by the federal government for the Child Tax Credit and the Earned Income Credit are directed to parents and families who epitomize the reasons for the poor debtor’s exemptions. Private creditors should not be permitted to intercept that which is designed to assist the poorest of Virginia families. The addition of a new exemption at § 34-28.2 to shield spousal and child support also finds support in the viability of the family. Little argument should be necessary to justify permitting spouses and children—rather than creditors—to get the full support ordered by a court.

Options for Virginians in Bankruptcy

HB 2015 would also permit Virginia residents who file for relief under federal bankruptcy law to avail themselves of either Virginia or federal exemptions. Under the long-standing federal Bankruptcy Act of 1898, Congress deferred to the states on exemptions. This meant, for example, that a Texas debtor in bankruptcy could protect whatever assets a debtor outside bankruptcy could protect, while a Virginia debtor in or out of bankruptcy could protect whatever property Virginia exempted. The fact that Texas and Virginia protected very different items or values[5] was irrelevant, even though bankruptcy law was federal. When the federal bankruptcy laws were modernized in 1978, the 1978 Bankruptcy Code established uniform federal exemptions but individual states would be permitted to “opt out” of those exemptions, forbidding their own citizens the ability to claim the federal exemptions in bankruptcy.[6] Virginia is among roughly half the states that have opted out.[7]

With the 2005 amendments to the Bankruptcy Code, Congress attempted to limit what it perceived as an abuse by some debtors who on the eve of bankruptcy would move from a state with less generous exemptions to one with exemptions that were more generous. Under the current Bankruptcy Code, the applicable exemptions are those of the state where a debtor resided for 730 days before the bankruptcy filing. In other words it takes a full two years of residence to take advantage of the exemptions of a new home state.

Understandably, state exemption laws were not written with these new federal bankruptcy provisions in view. In particular, many state exemption laws protect only a homestead “in the jurisdiction.”[8] To address this problem that it had created, Congress went on to provide that if a debtor is not eligible for any state exemption, he or she can take the federal exemptions, even if their new home state has opted out.[9] These changes to the Bankruptcy Code entail the peculiar result that, by leaving Virginia, many debtors will be able use federal exemptions and that further, for two years after arriving, most people moving into Virginia will also be able to use federal exemptions (either because their previous state does not allow non-residents to use its exemptions or because it allows the election of federal bankruptcy exemptions). This convoluted situation creates unfairness for loyal Virginians who are left only with the Virginia exemptions while those who just arrived in or leave the Commonwealth (even if the motive is to get better exemptions) get better treatment.

Thus, rather than insuring fairness in treatment of Virginia residents whether they are in or outside of bankruptcy, Virginia’s opt-out has increased unfairness by treating some Virginia residents differently than other ones. Congress, not Virginia, has created this problem but at this time only Virginia can restore a level playing field.

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[1] In re Latham, 182 B.R. 479 (Bankr. W.D. Va. 1995) (“The purpose of the homestead exemption is to protect the debtor from being left destitute from creditor process.”).

[2] Several of the items described in Virginia’s poor debtor exemption (Va. Code Ann. § 34-26) fall into this category. For example, household furnishings, a firearm, medically prescribed health aids, and “tools of the householder’s occupation or trade” (including automobiles) demonstrate “fresh start” exemptions.

[3] Virginia’s homestead exemption (Va. Code Ann. § 34-4), which can be applied to a wide variety of property, is designed for this purpose.

[4] Many of the items described in Virginia’s poor debtor exemption (Va. Code Ann. § 34-26) fall into this category. For example, the family Bible, wedding and engagement rings, family portraits and heirlooms, a burial plot, wearing apparel, and pets demonstrate dignitary exemptions.

[5] The extraordinary generosity of exemptions in Texas is well known.

[6] See 11 U.S.C. § 522(b)(2).

[7] Va. Code Ann. § 34-3.1.

[8] See In re Tate, 2007 WL 81835 (Bankr. Or. 2007).

[9] 11 U.S.C. § 522(b)(3).