Homestead Havens Still Viable?

In what may be the first reported decision applying the BAPCPA amendments, an Arizona bankruptcy court has concluded that Congress screwed up in drafting the cap on homestead exemptions. In re McNabb, 326 B.R. 785 (Bankr. D. Ariz. 2005). In McNabb, the court found that the particular language Congress used meant that the cap only applies in the few states where a debtor has a choice between state and federal exemptions -- and not in states that have "opted out" of the federal exemptions, including Arizona (and, it should be noted, Florida, a notorious debtor haven).

The McNabb court focused on the portion of 522(p) which says that it applies "as a result of electing" the state exemptions. Although 11 U.S.C. 522 is drafted so that debtors have a choice between the state and federal exemptions, it also allows states to "opt out" of the election and require resident debtors to only use the state exemptions. Most state legislatures have passed laws "opting out". Since residents of those states cannot "elect" betweeen the federal and state exemptions, the McNabb court determined that the 522(p) cap does not apply to them.

Since the court found the language unambiguous, it saw no need to refer to legislative history; upon reviewing the history, the court found it "virtually useless" in interpreting the particular language at issue. Although Judge Haines conceded that "it makes little sense" to limit the cap to the few non-opt-out states, while permitting residents in states that have opted out to take advantage of more generous homestead exemptions, he concluded that this was a problem for Congress to fix and not the courts.

The McNabb ruling, if followed by other courts, will substantially limit the application of the 522(p) homestead cap.