Constitutional Limitations on State-Enacted Bankruptcy Exemption Legislation and the Long Overdue Case for Uniformity

Abstract

The division of responsibility between state and federal authorities in bankruptcy is complex. The U.S. Constitution cedes the power to pass bankruptcy laws to the federal government. For political reasons, however, since 1867 the federal bankruptcy law has deferred to one degree or another to the states with respect to the designation of property exempt from administration in a bankruptcy case. The constitutionality of this practice under the uniformity requirement in the Bankruptcy Clause of the Constitution has been settled since 1902. More recently, however, considerable disagreement has arisen in the case law over whether this deference extends to exemptions enacted by a state that apply solely in bankruptcy. In this article, the author examines the constitutionality of such exemptions under both the Bankruptcy and the Supremacy Clauses. He concludes that serious questions exist on both counts given the potential of such exemptions, respectively, to undermine the uniform application of core bankruptcy policy and frustrate the full attainment of the goals of the bankruptcy system. At the same time, however, the author notes that the growth in the prevalence of such exemptions, coupled with other contemporary social and economic developments, suggest that the political considerations that for so long accounted for the use of state exemptions in bankruptcy cases may have abated to the point that the issue can be most efficaciously resolved by federalizing bankruptcy exemptions — an approach near-unanimously urged by congressional commissions and commentators for over forty years as far superior to the present system.

Keywords: bankruptcy, federal bankruptcy law, state bankruptcy exemptions, bankruptcy exemption, Supremacy Clause, uniformity, federalizing bankruptcy exemptions