NCPA - National Center for Policy Analysis

Bankruptcy Cozy In Lenient States

January 7, 1998

Some states allow those filing for bankruptcy to keep million-dollar homes and live sumptuously -- a situation that Harvard Law School professor Elizabeth Warren calls "the single biggest scandal in the consumer bankruptcy system."

  • Florida and Texas -- and, to a lesser degree, Iowa, Kansas and South Dakota -- have fast become debtors' paradises.
  • Big spenders who file for bankruptcy there get to keep not only luxurious homes, but often millions of dollars in wages, annuities and pension income as well.
  • By contrast, debtors in some states, such as New York and New Jersey, can wind up with little or nothing.
  • For example, an Iowa debtor can keep a $1 million home, but a person who has a $6,000 home in Oklahoma would lose it.

The American Bankers Association estimates that a record 1.35 million people filed for bankruptcy last year -- seeking to discharge $40 billion in debt. That's 13.4 percent more than in 1996.

In 1996, one household in every 82 nationwide declared bankruptcy.

Under a provision of federal law known as Chapter 7, debtors can exempt certain assets from seizure. States are allowed to set their own ceilings on what bankruptcy filers can keep and legislate whether debtors can choose the federal allowance instead. Debtors who choose the federal allowance can keep $15,000 in home equity. Only 18 states allow that option.

Source: David J. Morrow, "Key to a Cozier Bankruptcy: Location, Location, Location," New York Times, January 7, 1998.

 

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