Bankruptcy Laws in Illinois

Document Sample
Bankruptcy Laws in Illinois Powered By Docstoc
Peter C. Alexander* and Kevin A. Hays**

                                     I. INTRODUCTION

      In 2005, Congress passed the Bankruptcy Abuse Prevention and
Consumer Protection Act (“BAPCPA”).1 The express purpose behind
BAPCPA’s passage was to “improve bankruptcy law and practice by restoring
personal responsibility and integrity to the bankruptcy system . . . [and] ensure
that the system is fair for both debtors and creditors.”2 Lost in the history of
this new law–which covers nearly ten years–is any regard for potential
constitutional defects that might cause the 2005 amendments to be rendered
      Article I, section 8 of the United States Constitution4 reserves to
Congress the power to enact uniform bankruptcy laws. The “Bankruptcy
Clause” or the “Uniformity Clause,” as it is often referred to by the bankruptcy
community, is more complex than its name might suggest. “Uniform” is a
word that is used in modern parlance; in fact, The New Lexicon Webster’s
Dictionary of the English Language defines it as “being the same in form,
character, degree, etc. without variation. . . .”5 But scholars have long
recognized “uniform bankruptcy laws” as something less-than-uniform.6

*    Dean and Professor of Law, Southern Illinois University School of Law. B.A., Southern Illinois
     University; J.D., Northeastern University School of Law. The author wishes to thank my research
     assistant, Kevin Hays, for his thoughtful research, writing and editing.
**   J.D. Candidate 2007, Southern Illinois University School of Law; B.S., Social Work, 2004, Southern
     Illinois University Carbondale.
1.   S.256, Pub. L. No. 109–8, 119 Stat. 23 (2005) (codified at 11 U.S.C.A. §§ 101–1502 (West Supp.
2.   151 Cong. Rec. H1974 (daily ed. Apr. 14, 2005) (statement of Rep. Sensenbrenner).
3.   The enabling language for BAPCPA does not contain a savings clause; therefore, a successful
     challenge to a provision within the new law could invalidate the entire law. Compare KH Outdoor,
     L.L.C. v. City of Trussville, Alabama, 366 F. Supp. 2d 1141, 1145 (N.D. Ala. 2005) (describing a city
     ordinance that contains a section entitled “Savings Clause” which provides “If any section, clause,
     provision or portion of this ordinance shall be held to be invalid or unconstitutional by any court of
     competent jurisdiction, such holding shall not affect any other section, clause, provision or portion
     of this ordinance which is not in and of itself invalid or unconstitutional.”).
4.   U.S. CONST. art. I, § 8.
     Inc. 1989).
6.   See, e.g., Laura B. Bartell, The Peripatetic Debtor: Choice of Law and Choice of Exemptions, 22
     EMORY BANKR. DEV. J. 401, 403 (2006); Judith Schenck Koffler, The Bankruptcy Clause and
     Exemption Laws: A Reexamination of the Doctrine of Geographic Uniformity, 58 N.Y.U. L. REV. 22

550                     Southern Illinois University Law Journal                                [Vol. 31

       There have been a number of challenges to bankruptcy laws on the theory
that they violate the Uniformity Clause.7 Among the areas of non-uniformity
that have been discussed are the existence of two different forms of bankruptcy
administration (the Office of the United States Trustee and the Bankruptcy
Administrator Program) and the existence of a new and complicated
exemption scheme. The former affects primarily business debtors and the
latter affects primarily consumer filers. When BAPCPA was enacted,
Congress may have inadvertently complicated the discussion about the
constitutionality of these two provisions.
       This essay will discuss how the Uniformity Clause is impacted (1) when
government oversight of chapter 11 reorganizations in six federal districts is
markedly different than it is in all of the other federal districts and (2) when
the new exemption laws within BAPCPA are applied to debtors. There may
be several other provisions in the U.S. Bankruptcy Code8 (“Code”) that may
run afoul of the Uniformity Clause, but the exploration of those issues is better
left to a longer piece.


      In 1986, Congress passed the Bankruptcy Judges, United States Trustees,
and Family Farmer Bankruptcy Act (“Act”).9 The Act created a nationwide
program of bankruptcy administration, expanding the United States Trustee
Program (“UST Program”) from eighteen pilot federal districts to nearly every
other district.10 The Act gave oversight authority to the United States Trustees
in every judicial district except the six located within the borders of the States
of Alabama and North Carolina.11
      Since 1986, the UST Program has grown in size and scope and has
become a massive bureaucracy within the U.S. Department of Justice.12 It is

      (1983); Thomas E. Plank, The Constitutional Limits of Bankruptcy, 63 TENN. L. REV. 487 (1996).
7.    See, e.g., Ry. Lab. Executives’ Ass’n. v. Gibbons, 455 U.S. 457, (1982) (railroad bankruptcies); In
      re Reese, 91 F.3d 37 (7th Cir. 1996) (personal exemptions); In re Bernier, 176 B.R. 976 (Bankr. D.
      Conn. 1995)(sale of a co-owner’s interest by a trustee-in-bankruptcy); and In re Miles, 330 B.R. 861
      (Bankr. M.D. Ga. 2005) Bankruptcy Administrator Program vs. United States Trustee Program).
8.    Pub. L. No. 95–598, title I, §101 et seq., 92 Stat. 2549 (1978) (codified primarily as Title 11 of the
      United States Code), as amended.
9.    See Pub. L. No. 99–554, §§ 111, 301–311, 100 Stat. 3088, 3118 (1986) (codified as amended at 28
      U.S.C. §§ 581–586 (1994)).
10.   Id.
11.   Id. §§ 302(d)(3)(E)(i) & (ii).
12.   See generally Peter C. Alexander, A Proposal to Abolish the Office of U.S. Trustee, 30 U. MICH. J.L.
      REFORM 1 (1996) (reviewing the creation and development of the Office of U.S. Trustee and
      comparing it to the BA Program).
2007]                        Non-Uniform Bankruptcy Laws                                        551

comprised of twenty-one regions, with a U.S. Trustee in charge of each region,
who oversees the activities of countless Assistant U.S. Trustees, bankruptcy
analysts, and panel and standing trustees.13 The current mission statement of
the UST Program is stated as follows: “The USTP mission is to promote
integrity and efficiency in the nation’s bankruptcy system by enforcing
bankruptcy laws, providing oversight of private trustees, and maintaining
operational excellence.”14
      The 1986 Act also excepted the six federal districts in Alabama and
North Carolina from the UST Program.15 In those districts, bankruptcy
oversight is performed by the Bankruptcy Administrator Program (“BA
Program”), which is part of the judicial branch of government.16 The mission
of the BA Program is similar to the UST Program. The BA Program’s web-
site describes it as follows:
      The U.S. Bankruptcy Administrator Program (USBA) is an agency of the
      Judiciary, the third branch of the federal government. The USBA oversees
      the administration of bankruptcy cases and private trustees, and monitors the
      transactions and conduct of parties in bankruptcy. Separate and distinct from
      the federal bankruptcy courts, the USBA and its attorneys regularly appear
      before the U.S. Bankruptcy Courts on all aspects of bankruptcy matters for
      the purpose of assisting the Courts in insuring that bankruptcy cases are
      administered properly, and in conformance with applicable laws and
      procedures. Additionally, the USBA works in coordination with other
      government agencies, including the Department of Justice, the Federal
      Bureau of Investigation, and the Internal Revenue Service, to identify and
      investigate bankruptcy fraud and abuse.17

13.   Id. at 2–3.
14.   Home page of the United States Trustee Program,
      (last visited Apr. 4, 2007).
15.   28 U.S.C. § 581(2000).
      STATES TRUSTEE PROGRAM 8 (1995) [hereinafter NAPA Report].
17.   The home page of the Bankruptcy Administrator for the Northern District of Alabama describes the
      program on its home page.
      U.S. BA Program for the Northern District of Alabama home page, viewed at www.alnba.uscourts.
      gov (last visited on Apr. 4, 2007).
552                     Southern Illinois University Law Journal                                [Vol. 31

The BA Program has been described as being “superior” to the UST
Program,18 more efficient,19 and more popular.20 The BA Program was
established because of great dissatisfaction with the UST Program.21
    Unhappiness with the UST Program is not what raises a constitutional
question concerning the Uniformity Clause. In order to have standing to raise
a constitutional challenge to legislation:
      First, the plaintiff must have suffered an “injury in fact”–an invasion of a
      legally protected interest which is (a) concrete and particularized, and (b)
      actual or imminent, not conjectural or hypothetical. Second, there must be a
      causal connection between the injury and the conduct complained of . . ..

18.   Dan J. Schulman, The Constitution, Interest Groups, and the Requirements of Uniformity: The United
      States Trustee and the Bankruptcy Administrator Programs, 74 NEB. L. REV. 91, 125 (1995), citing,
      U.S. GAO , Pub. No. GAO/GGD–92–133, Bankruptcy Administration: Justification Lacking for
      Continuing Two Parallel Programs 1, 40 (1992) (reprinting letter from L. Ralph Mecham, Director
      of the Administrative Office of the U.S. Courts, to Richard L. Fogel, Assistant Comptroller General
      (July 15, 1992) in which he writes "The overall superiority demonstrated by the BA program over the
      UST program not only justifies its continuation in the six districts in North Carolina and Alabama,
      but justifies its expansion into other districts.").
19.   The Bankruptcy Review Commission, which was established by Congress in 1994 to recommend
      changes to the U.S. Bankruptcy Code. In its Report, dated October 20, 1977, the Commission
            The Commissioners learned that the BA Program is decentralized, that decisions are made
            in the field by BA's who are actually practicing in the courts, and that because of the
            structure of the program, BA's are able to respond to local initiatives and the judicial
            philosophy of the courts in which they practice. The Commissioners also learned that the
            last empirical study of the cost of the two programs was done by the General Accounting
            Office, which found that the BA Program operates at an average cost which is twenty-two
            (22%) percent lower than the UST Program.
      Report of the National Bankruptcy Review Commission, “The Bankruptcy Administrator Program
      and the U.S. Trustee Program,” viewed at
      05.html (last visited on Apr. 4, 2007).
20.   Cf. NAPA REPORT, supra note 16, at 35 (noting that a large segment of the bankruptcy community
      resists intervention by the U.S. Trustee); Dan J. Schulman, Issues in Litigation: Constitutionality of
      the United States Trustee/Bankruptcy Administrator Programs, 4 J. BANKR. L. & PRAC. 319, 321
      (1995) (describing George S. Wright, then-Chief Bankruptcy Judge for the Northern District of
      Alabama, an ardent supporter of the BA Program).
21.   See Schulman, supra note 20, at 321 & n.21. The BA Program is administered by the Administrative
      Office of the United States Courts, while the UST Program is administered by the Department of
      Justice. See website of the U.S. Bankruptcy Court for the Eastern District of North Carolina,
      “Reorg anization Under the Bankruptcy Code ) Chapter 11,” http://www. (last visited on Apr. 4, 2007). The BA Program is, arguably more
      efficient than the UST Program because it is a part of the judicial branch and does not require a new
      set of rules, policies and procedures to be created. See also Alexander, supra note 12, at 36, (“One
      explanation for the BA’s superior efficiency is that it is part of the government’s judicial branch.
      Placing the agency charged with overseeing the bankruptcy system within the judiciary seems
2007]                         Non-Uniform Bankruptcy Laws                                            553

      Third, it must be likely, as opposed to merely speculative, that the injury will
      be redressed by a favorable decision.22
In St. Angelo v. Victoria Farms, Inc.,23 the debtor, Victoria Farms, Inc.,
challenged the constitutionality of the UST Program requiring chapter 11
debtors to pay quarterly administrative fees. Those fees amounted to more
than $4,000 per quarter and were dramatically different than chapter 11
administration in BA Program jurisdictions because the BA Program did not
collect fees from chapter 11 debtors and had no statutory authority to do so.24
Victoria Farms argued that, because the UST Program was not present in every
jurisdiction and debtors were not required to pay the quarterly fees in every
jurisdiction, the bankruptcy oversight scheme was not uniform.25 The court in
St. Angelo agreed that the existence of both the UST and BA Programs caused
a Uniformity Clause violation; however, the court struck down the statutory
provisions that enabled the federal courts in Alabama and North Carolina to
opt-out of the UST Program.26
     Since the St. Angelo ruling, Congress amended the laws to permit the BA
Program to collect quarterly fees as well.27 Even though both programs now
collect fees from debtors in chapter 11 cases, interviews conducted with two
Bankruptcy Administrators suggest that important differences remain between
the BA Program and UST Program and whether the existence of the two
programs constitutes a “uniform” bankruptcy system is still in question.
     Travis M. Bedsole, Jr., the Bankruptcy Administrator for the U.S.
Bankruptcy Court for the Southern District of Alabama, believes that
significant differences exist between the two programs.28 He acknowledges
that his office now collects quarterly fees from debtors, just like the UST
Program, but notes that the BA Program does not have “the layered regional
offices or the bureaucracy.” The BA Program in the Southern District of

22.   United States v. Hays, 515 U.S. 737, 742–43, (1995) (quoting Lujan v. Defenders of Wildlife, 504
      U.S. 555, 560–61 (1992)). See also In re Miles, 330 B.R. 861, 864 (Bankr. M.D. Ga. 2005).
23.   38 F.3d 1525 (9th Cir. 1994).
24.   See id. at 1528–29.
25.   See id at 1529.
26.   See id. at 1533; see also Schulman, supra note 20, at 328–29 (noting that the decision to declare the
      BA Program unconstitutional might run afoul of the doctrine of judicial restraint because the ruling
      court was in the U.S. Court of Appeals for the Ninth Circuit while the BA Program exists only within
      the Fourth and Eleventh Circuits); Alexander, supra note 12, at 18–21 (arguing that the Ninth
      Circuit’s decision has no practical effect because it has no authority over the BA Programs in the
      Fourth and Eleventh Circuits).
27.   28 U.S.C. § 1930(a)(7) (2000).
28.   Information about the BA Program in the Southern District of Alabama was obtained from Travis M.
      Bedsole, Jr., the Bankruptcy Administrator for the U.S. Bankruptcy Court for the Southern District
      of Alabama, in a telephone interview on February 5, 2007.
554                   Southern Illinois University Law Journal                          [Vol. 31

Alabama uses one chapter 13 trustee for the entire district, which is different
from districts within the UST Program’s jurisdiction. Mr. Bedsole believes
that using one trustee capitalizes on “economies of scale”; as a result, he
believes that the chapter 13 administrative expenses that the trustee charges to
chapter 13 debtors is less than those in the UST Program districts. He is
particularly proud of the fact that his office is able to respond to the needs of
particular debtors and their attorneys. There is no “one size fits all” on
operating reports; all forms are tailored to get the specific facts that are needed
in each case.
     Marjorie K. Lynch, the Bankruptcy Administrator for the U.S. Bankruptcy
Court for the Eastern District of North Carolina, also feels that efficiency is a
hallmark of her operation.29 Ms. Lynch oversees a program that she, too,
considers to be efficient and responsive to the needs of bankruptcy
professionals. She cites as one of the more appealing characteristics of the BA
Program its ability to operate under Judicial Conference regulations as
opposed to the detailed and complex policies of the UST Program.30
Moreover, she describes the UST Program as “more prosecutorial” and the BA
Program as collaborative. Ms. Lynch notes that the BA Program is guided by
the Judicial Conference regulations, but the operation is “localized” in that
trustees are allowed to use their best judgments in applying those regulations.
     More importantly, Ms. Lynch also notes that having the BA Program
operate as part of the judicial branch diminishes the likelihood that there might
be conflicts of interest in a particular bankruptcy case. She cites the example
of a dispute that might arise between a debtor and the Internal Revenue Service
(“IRS”). While it is not an unusual occurrence for the IRS to be an adversary
of a debtor in a bankruptcy proceeding, it is, arguably, a conflict of interest to
have the UST Program in the litigation between a debtor and the IRS. Both
the UST Program and the IRS are agencies within the executive branch of
government and it is difficult to imagine that the UST Program can truly
“promote integrity and efficiency in the nation’s bankruptcy system”31 when
it appears to be inextricably aligned to one of the parties in the dispute. Ms.
Lynch notes that the BA Program “doesn’t have an economic stake in the
outcome” of various motions, adversaries or many other contested matters, but

29.   Information about the BA Program in the Eastern District of North Carolina was obtained from
      Marjorie K. Lynch, the Bankruptcy Administrator for the U.S. Bankruptcy Court for the Eastern
      District of North Carolina, in a telephone interview on February 5, 2007.
30.   For a summary of the rules and regulations of the UST Program, see (last visited on Apr. 4, 2007).
31.   See Alexander, supra note 12.
2007]                          Non-Uniform Bankruptcy Laws                                                555

the UST Program might–especially when one party to the controversy is also
the executive branch.32
    Although discussions regarding “uniformity” have been taking place for
decades, they have not yet included a debtor’s exposure to potential conflicts
of interest as the basis to argue that the provisions of the Code are non-
uniform. At the very least, however, the conflict-of-interest issue suggests an
appearance of impropriety and/or self-dealing that debtors should not have to
face. It becomes of particular concern when a group of debtors, i.e., those in
Alabama and North Carolina, do not have to confront the issue.


     The Bankruptcy Code permits consumer debtors to exempt certain
property from the reach of a trustee-in-bankruptcy.33 In fact, exemption laws
have appeared in the Code at least since the Bankruptcy Act of 1800.34
Exemption laws have long served two important functions–they provide a
debtor with sufficient property to survive and remain productive,
notwithstanding a bankruptcy filing, and they shift from the government to the
creditors the burden of supporting a bankrupt.35
     BAPCPA continues the practice of allowing a person to exempt certain
property from being brought into a chapter 7 proceeding.36 These exemptions
are available to anyone who files a petition for bankruptcy, unless they live in
a state that has opted-out of the federal exemption scheme and requires its
debtors to use the state’s exemption laws.37 This opt-out procedure allows for
debtors to be treated differently, depending upon the state in which a debtor
lives.38 As a result, debtors from different states could emerge from
bankruptcy with very different property.
     For example, in Pennsylvania, an unmarried debtor is entitled to keep from
the reach of creditors an Individual Retirement Account, three hundred dollars,

32.   At the Symposium where this paper was presented, a member of the audience suggested that the
      likelihood of a conflict of interest is more than just a passing notion. He reminded everyone in the
      audience that the IRS often relies on lawyers from the U.S. Attorney’s staff (the Department of
      Justice) to prosecute IRS cases in bankruptcy and that the U.S. Trustee’s Office is a division of the
      Department of Justice.
33.   11 U.S.C.A. § 522 (West Supp. 2006).
34.   Bartell, supra note 6, at 403.
35.   See id. at 402–03.
36.   See § 522(b)(1).
37.   Property listed in this paragraph is property that is specified under subsection (d), unless the State law
      that is applicable to the debtor under paragraph (3)(A) specifically does not so authorize.
      § 522(b)(2).
38.   Id.
556                     Southern Illinois University Law Journal                              [Vol. 31

books, a Bible, a desk and a sewing machine.39 By contrast, Texas debtors
may keep significantly more property; including a rural homestead exemption
of up to two hundred acres, plus all improvements thereon, or an “urban”
homestead exemption of up to ten acres, plus all improvements thereon.40 In
addition, Texas provides its citizens with personal property exemptions that
are considerably more generous than the Pennsylvania exemptions. Texans
may keep personal property, not to exceed thirty-thousand dollars.41
Pennsylvania does not prevent its citizens from claiming the federal
exemptions contained within the Code, so debtors from that jurisdiction
actually have two sets of exemptions from which to choose, although
unmarried Pennsylvanians almost never elect the state exemptions over the
more generous federal exemptions.42 Texas also permits its citizens to choose
either the state or federal exemptions, but it is hard to imagine why a debtor
would choose the federal exemptions when the Texas exemptions are so
     With the passage of BAPCPA, language was added to the Code to help
determine which state’s exemption laws would apply if a bankrupt moved to
a different state in order to take advantage of more generous exemptions. The
new provision states:
      [A]ny property that is exempt under Federal law, other than subsection (d) of
      this section, or State or local law that is applicable on the date of the filing of
      the petition at the place in which the debtor's domicile has been located for
      the 730 days immediately preceding the date of the filing of the petition or if
      the debtor's domicile has not been located at a single State for such 730-day
      period, the place in which the debtor's domicile was located for 180 days
      immediately preceding the 730-day period or for a longer portion of such
      180-day period than in any other place 44
The new law means that a debtor, who has not lived in her current jurisdiction
for two years prior to filing bankruptcy, must use the exemption laws of the
jurisdiction where she lived during the six months prior to that two-year

39.   42 Pa. Cons. Stat. § 8123 and § 8124.
40.   See VERNON’S ANN. TEXAS CONST., Art. XVI, § 51.
41.   See TEX. PROP. CODE §42.001(a)(2) (2006). “Personal property” includes, inter alia, home
      furnishings, farming or ranching vehicles and implements, wearing apparel, tools, jewelry, two
      firearms, athletic and sporting equipment, two horses, mules, or donkeys, 12 head of cattle, 60 head
      of other types of livestock, 120 fowl, and household pets. TEX. PROP. CODE §42.002.
42.   The exemptions under the Bankruptcy Code include a homestead exemption of $18,450, a vehicle
      exemption of $2,950, household goods and furnishings exemption of $9,850, a jewelry exemption
      of $1,225. § 522(d).
43.   See In re Bradley, 960 F.2d 502, 506, n.2 (5th Cir. 1992).
44.   § 522(b)(3)(A).
2007]                       Non-Uniform Bankruptcy Laws                                        557

period. Moreover, if she moved around during the six-month period, she must
use the exemption laws of the jurisdiction in which she lived the greater part
of the six-month period.
     The effect of the new law is that there is now a possibility that two
residents of the same state could go through bankruptcy subject to very
different exemption laws. To illustrate the different treatment that might occur
under the new law, consider the following hypothetical: The debtor is a single
male who was laid off from work 180 days prior to filing a chapter 7. The
debtor owns a home valued at $200,000, which is encumbered by a mortgage
of $150,000. The debtor also owns a vehicle that is worth $8,000, household
goods and furnishings totaling $5,000, and some family pictures and wearing
apparel with minimal value.
     If this hypothetical debtor was a resident of Illinois, the exemptions that
apply to him come from the State of Illinois because the State has opted-out
of the federal exemption scheme.45 Under Illinois law, the homestead
exemption is $15,000.46 Since the debtor has equity in his home in excess of
$15,000, he could lose his home. Likewise, the value of his vehicle exceeds
the State’s exemption for an automobile so he could lose the vehicle as well.47
The debtor would be able to keep all his wearing apparel and $4,000 worth of
other personal property.48
     If the same debtor was a resident of Texas, he has two choices because
Texas allows him to elect either the federal exemption scheme or the
exemptions provided for under the laws of the State of Texas.49 If he chooses
the Texas exemptions, his entire homestead is exempt and the $30,000
personal property exemption would allow him to keep all of his other
property.50 He also gets to keep $30,000 worth of personal property; this
includes home furnishings and vehicles.51 This means our hypothetical debtor
would keep all of his property despite going through bankruptcy. If this debtor
chose the federal exemptions, he would fare just slightly better than the Illinois
debtor because the Illinois exemption amounts are close to, but not quite as
high as the federal exemptions.52

45.   735 ILL. COMP. STAT. 5/12–1201 (2006).
46.   735 ILL. COMP. STAT. 5/12–901.
47.   If the vehicle were to be sold, the debtor would be able to keep $2,400 from the sale and the
      remainder of the sale proceeds would be used to pay creditors and expenses associated with the
      liquidation. 735 ILL. COMP. STAT. 5/12–1001.
48.   Id.
49.   TEX. PROP. CODE ANN. §§ 41–42 (Vernon 2006).
50.   TEX. PROP. CODE ANN. § 41.002.
51.   TEX. PROP. CODE ANN. §§ 42.001, 42.002.
52.   The Illinois exemptions laws were amended, effective January 1, 2006.
558                    Southern Illinois University Law Journal                             [Vol. 31

     If the debtor was a citizen of Alabama, he would have to use the Alabama
exemptions because Alabama has also opted-out of the federal exemption
scheme.53 A debtor from Alabama is entitled to a $5,000 exemption from the
sale of the home as long as he is a resident of Alabama.54 He is allowed to take
an exemption of $3,000 from his personal property, and he is allowed to
exempt all of his wearing apparel, books, and family pictures.55
     Three very different results occur, depending upon the state in which the
debtor lives. The Illinois debtor keeps $21,400 worth of property and all of his
wearing apparel. The Texas debtor keeps his entire homestead and $30,000
worth of personal property, if he elects the state exemptions. The Alabama
debtor keeps $8,000 worth of property and his wearing apparel. These
variations, alone, are not a violation of the Uniformity Clause because courts
have held that citizens of different states may be subjected to different
exemption laws.56 But what happens if the new exemption provisions are
applied to two debtors from the same state and with the same financial
situation, except one of them has not lived in the host state for two years prior
to filing bankruptcy?
     If the “hypothetical” debtor lived in Illinois for the 730-day period prior
to filing a chapter 7 bankruptcy relief, the Illinois exemptions would apply and
the debtor would be entitled to a $15,000 exemption in his home, a $2,400
exemption in his car, a $4,000 personal property exemption, and all of his
wearing apparel and pictures. If a second debtor lived in Illinois for only one
year, and had moved to Illinois after having lived in Alabama for many years,
Alabama’s exemption laws would apply to him.57 The debtor probably would
not be entitled to the Alabama $5,000 homestead exemption because the
exemption statute exempts a homestead for Alabama residents.58 He might,
however, be entitled to a $3,000 vehicle exemption and all of his wearing
apparel and family pictures.

53.   ALA. CODE § 6–10–11 (2006).
54.   ALA. CODE § 6–10–2.
55.   ALA. CODE § 6–10–6.
56.   See Butner v. United States, 440 U.S. 48, 54 n. 9 (1979) (citing Stellwagen v. Clum, 245 U.S. 605,
      613 (1918). See also Randolph J. Haines, The Uniformity Power: Why Bankruptcy is Different, 77
      AM. BANKR. L.J. 129, 158–65 (2003)(discussing how geographical regions impact exemption laws).
57.   See 11 U.S.C.A. § 522(b)(3)(A) (West Supp. 2006).
58.   See supra note 54.
2007]                        Non-Uniform Bankruptcy Laws                                         559

                   IV. THE TRUE MEANING OF “UNIFORM”

    There have been many challenges to the variation in exemption laws, but
courts have consistently found no Uniformity Clause violations.59 The case of
Hanover National Bank v. Moyses60 provides an explanation. In Moyses, the
U.S. Supreme Court ruled that all the Constitution requires is “geographical”
uniformity and not “personal” uniformity.61 Professor Charles Tabb provides
additional insight:
      Thus, a bankruptcy law is "uniform" when (i) the substantive law applied in
      a bankruptcy case conforms to that applied outside of bankruptcy under state
      law; (ii) the same law is applied to all debtors within a state and to their
      creditors; and (iii) Congress uniformly delegates to the states the power to fix
      those laws. The fact that debtors and creditors in different states may receive
      different treatment does not render the law unconstitutional.62
     The new exemption laws in BAPCPA, for debtors who have not lived in
a jurisdiction for two years prior to filing bankruptcy, may finally present a
legitimate Uniformity Clause violation. In the hypothetical involving the two
Illinois debtors, the fact that one moved to Illinois from Alabama just one year
prior to filing bankruptcy is significant. For any purpose other than
bankruptcy, both individuals are Illinoisans and are subject to the laws of the
State of Illinois. In bankruptcy, however, the Illinoisan who moved to the
State from Alabama must use Alabama’s more restrictive exemptions.
     The purpose of exemption laws are well-settled. As Professor Alan
Resnick has explained:
           Current state and federal exemption laws promote five distinct social
      (1) To provide the debtor with property necessary for his physical survival;
      (2) To protect the dignity and the cultural and religious identity of the debtor;
      (3) To enable the debtor to rehabilitate himself financially and earn income
      in the future; (4) To protect the debtor’s family from the adverse
      consequences of impoverishment; (5) To shift the burden of providing the

59.   See supra note 6.
60.   186 U.S. 181 (1902).
61.   Id. at 188. See also Erwin Chemerinsky, Constitutional Issues Posed in the Bankruptcy Abuse
      Prevention and Consumer Protection Act of 2005, 79 AM. BANKR. L.J. 571, 592–93 (Summer 2005)
      (explaining the differences between personal and geographical uniformity) (citing Charles Jordan
      Tabb, The History of the Bankruptcy Laws in the United States, 3 AM. BANKR. INST. L. REV. 5, 46
      (1995)); Koffler, supra note 6, at 83 (discussing geographic uniformity).
62.   Tabb, supra note 61, at 47.
560                   Southern Illinois University Law Journal                      [Vol. 31

      debtor and his family with minimal financial support from the society to the
      debtor’s creditors.63
     If one of the purposes of restricting a debtor’s use of exemption laws is to
place the burden of supporting the debtor on the creditors and not the
government, then allowing a resident of the State of Illinois a greater or
smaller exemption, simply because they moved from one state to another
within a particular time period, not only places a greater burden on the citizens
of any state they decide to move to, but it has the potential to either over-or
under-compensate the creditors of the bankrupt.
     The Illinois debtors in the hypothetical above own the same property and
have the same reason for claiming bankruptcy, but they will leave bankruptcy
with very different items of property and very different fresh starts. The
citizens of Illinois may have to provide support to the debtor whose
exemptions are controlled by Alabama law because the property that debtor is
left with falls short of the amount of exempt property that the Illinois
Legislature determined to be appropriate for its citizens. The manner in which
the two debtors are treated seems to violate the essence of bankruptcy, which
is to treat similarly situated people similarly. If, as Professor Tabb instructs,
a bankruptcy law is “uniform” when, among other things, “the same law is
applied to all debtors within a state and to their creditors,” the disparate
treatment in the hypothetical violates the Uniformity Clause.

                                   V. CONCLUSION

    BAPCPA will be studied by bankruptcy scholars and will be reviewed by
bankruptcy judges and others for years to come. As the bankruptcy
community takes a closer look at its provisions, it is likely that individuals will
identify provisions within the Bankruptcy Code that run afoul of the U.S.
Constitution’s requirement that there be uniform bankruptcy laws. At present,
however, at least two examples of non-uniformity should be addressed.
    When debtors file chapter 11 reorganizations, they should expect that the
administration of their cases will not vary depending upon the bankruptcy
court in which they file. Debtors filing in bankruptcy courts other than those
in Alabama and North Carolina will find their cases subjected to a set of
policies and regulations that will likely increase the overall cost of filing

63.   Alan N. Resnick, Prudent Planning or Fraudulent Transfer? The Use of Nonexempt Assets to
      Purchase or Improve Exempt Property on the Eve of Bankruptcy, 31 RUTGERS L. REV. 615, 621
      (1978). See generally MARGARET HOWARD, BANKRUPTCY CASES AND MATERIALS 100 (4th ed. 2005)
      (explaining the public policy behind exemption laws).
2007]                       Non-Uniform Bankruptcy Laws                    561

bankruptcy. Additionally, they may discover that the Office of the United
States Trustee, the governmental agency which is charged with oversight of
the bankruptcy system in those jurisdictions, may have conflicts of interest
when the debtor is litigating matters against other agencies within the
executive branch of government. These same concerns are present in
consumer bankruptcy cases.
    In consumer chapter 7 liquidations, the new BAPCPA provisions relating
to exemptions may also violate the Uniformity Clause. The new law, which
requires debtors to have been domiciled within a jurisdiction for the two years
prior to filing bankruptcy in order to use that jurisdiction’s exemptions, is
problematic.64 A debtor who moves into a state within the two-year period
will be denied the opportunity to take advantage of the exemption laws of her
new home state and, in some cases, may be severely penalized for doing so
because she will have to use the laws of her former state.
    “Uniformity” requires, at the very least, that debtors of the same state be
treated similarly. Unless Congress amends the exemption law provisions
within the Bankruptcy Code, it is likely that consumer debtors who must use
more restrictive exemption laws of a different state will also have a basis to
raise a constitutional challenge to BAPCPA.

64.   11 U.S.C.A. § 522(b)(3)(A) (West Supp. 2006).

Description: Bankruptcy Laws in Illinois document sample