15.2.5.3 Extraterritoriality

Another issue created by the 2005 amendments to the Bankruptcy Code is the extraterritorial effect of state exemption laws. Section 522(b)(3)(A), enacted to close the “mansion loophole”—that is, to prevent wealthy debtors from immunizing their entire fortune by moving to a state with an unlimited homestead exemption and a narrow fraud exception and buying a mansion there with all funds available to them—has created serious problems for ordinary debtors who happen to have moved within 730 days before bankruptcy. They are required to apply the exemption law of the state where they were domiciled for the 730 days immediately preceding the bankruptcy filing. If the debtor’s domicile was not located in a single state for this 730-day period, the debtor must use the exemption law of the state where the debtor was domiciled for the 180 days immediately preceding this 730-day period (or where the debtor was domiciled for the longest part of that 180-day period).

This requirement can force a debtor who owns a home in one state to apply the law of a former domiciliary state that does not extend its homestead exemption to real estate outside its borders. The problem is that some state homestead exemption statutes do not protect out-of-state real estate. Some state homestead exemption statutes are explicitly limited to in-state real estate.¹¹² If the statute is silent about its application to real estate located outside the state, some courts construe the statute to protect such property.¹¹³ If the result of this analysis is that the debtor is ineligible to take advantage of any state’s exemptions, the debtor may use the federal bankruptcy exemptions.¹¹⁴