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Posted by: Joshua McCloud
Delaware calls itself the First State because it ratified the U.S. Constitution before any other state, in early December 1787. In the last century, it has also become first in the minds of many entrepreneurs when deciding where to incorporate their businesses. Today, Delaware is home to more corporations, limited liability companies, and business partnerships than people.
But Delaware’s success in attracting new business formations hasn’t always translated to economic security for its residents. Although the unemployment rate in Delaware by the end of 2016 had fallen to half of its peak during the Great Recession, the last six months have seen it increase from 4.4% to 4.7%.
When Delaware residents find themselves in economic distress, unable to keep up with their debts, many turn to the U.S. Bankruptcy Code for help. The Bankruptcy Code offers debtors several options to help alleviate the heavy burden of accumulated debt. One option that is popular among Delaware debtors is filing bankruptcy under Chapter 7 of the Code.
This post provides basic information about Chapter 7 bankruptcy in Delaware. However, Delaware residents considering whether to file a Chapter 7 bankruptcy petition should consult a knowledgeable Delaware bankruptcy attorney before doing so.
What is Chapter 7 bankruptcy?
Chapter 7 bankruptcy is often referred to as a liquidation bankruptcy. In this kind of bankruptcy, a case trustee collects and sells all of a debtor’s non-exempt property. What property is exempt from sale depends on which state’s law applies in the case. This is because, although the Bankruptcy Code is a federal law that applies across the United States, it permits each state to define what exemptions are available for its residents.
After the trustee sells a debtor’s non-exempt assets, he or she will use the proceeds from those sales to pay as much of the debtor’s unsecured debts as possible. The Court then discharges the debtor from liability on most remaining unsecured debts.
For more background information on Chapter 7 bankruptcy, see How Chapter 7 Bankruptcy Works.
Who can file for Chapter 7 bankruptcy in Delaware?
Bankruptcy cases can only be filed in a state if venue is proper there. Generally, venue is proper in the state where a debtor lived for most of the six months immediately prior to filing. Consequently, a person can only file for Chapter 7 bankruptcy in Delaware if he or she lived in Delaware longer than anywhere else in the last six months.
However, a different test is used to determine which state’s exemptions will apply to a case. Specifically, the law of the state where a debtor lived for the two years prior to filing will determine what exemptions are available. If the debtor did not live in one state for that entire two-year period, then the court will apply the law of the state where the debtor lived for most of the six months preceding those two years.
Example: Alana files for Chapter 7 bankruptcy in Delaware on July 1, 2017. She has lived in Delaware since January 1, 2017, before which she had lived in Arkansas her whole life. Although venue is proper in Delaware, the court will look to Arkansas law to determine Alana’s exemptions.
What are the Delaware bankruptcy exemptions?
Unlike some states, which permit bankruptcy debtors to choose between their own exemptions and the federal bankruptcy exemptions defined in the Bankruptcy Code, Delaware requires debtors to use the Delaware state exemptions. That is, Delaware is an “opt-out” state, because it has opted out of the federal bankruptcy exemptions.
Some of the most significant Delaware exemptions are listed below. Most of the exemptions below are limited to a specified value. That value refers to a debtor’s equity in exempt property. Equity is the difference between property’s value and any debts secured by the property.
Example: Jeffrey owns a house in Delaware worth $250,000, but subject to a $175,000 mortgage. Because Jeffrey’s equity in his house is $75,000, he would be able to exempt it from liquidation in a Chapter 7 bankruptcy.
Delaware Bankruptcy ExemptionsThe top 5 exemptions under Delaware state law.
|Type of exemption||Delaware law|
|Homestead||$125,000, with some exceptions related to law violators|
|Personal property||$15,000 in tools of the trade, all clothing, another $500 in personal property if head of household, plus family pictures and books|
|Vehicle||$15,000, only if the vehicle is necessary for employment|
|Wages||85% earned but unpaid|
|Pension/retirement||Retirement accounts exempt (including rollover contributions for 60 days after distribution), plus several types of pensions|
If a person’s equity in otherwise-exempt property is greater than the limit on value, then the case trustee will be able to sell it. However, the trustee would pay the debtor an amount equal to the exemption limit out of the proceeds of that sale.
In addition to the exemption limits described below, Delaware limits the total amount that a debtor can exempt in personal property or real property to $25,000. However, that limit does not apply to retirement plans, the homestead, or a vehicle or tools of the trade necessary for purposes of employment.
When a married couple jointly files bankruptcy, each spouse can claim exemptions up to the exemption limits, except as to their homestead. In other words, the couple can “double” most of their exemptions.
Delaware exempts real property or a manufactured home that is used as the debtor’s principal residence, up to a value of $125,000. However, this exemption is unavailable if the debtor owes a debt arising from:
- A violation of state or federal securities law;
- Fraud, deceit, or manipulation in a fiduciary capacity or in connection with the purchase or sale of a security registered under federal law; or
- Any criminal act, intentional tort, or willful or reckless misconduct that caused serious physical injury or death to another individual in the prior five years.
Del. Code tit. 10, § 4914(c)(2) exempts a motor vehicle to a value of $15,000, but only if the vehicle is necessary for purposes of employment.
Other Personal Property
Various kinds of personal property are exempt under several different sections of Del. Code tit. 10, including:
- Section 4902: The family Bible, school books, family library, family pictures, a seat or pew in any church or place of public worship, a lot in a burial ground, and all clothing of the debtor and his or her family.
- Section 4903: If a debtor is the head of a family, he or she can exempt an additional $500 in personal property.
- Section 4914(c)(2): Tools of the trade necessary for purposes of employment, up to a value of $15,000.
- Section 4916: Assets held in and proceeds payable under a Delaware College Investment Plan or Delaware ABLE account are exempt to the extent of total contributions permitted under the Internal Revenue Code.
Under Del. Code tit. 10, § 4913, 85% of a person’s earned but unpaid wages are exempt. Wages include salaries, commissions, and other forms of remuneration paid to an employee by his or her employer for labor or services, but do not include payments to a person who is self-employed.
Retirement accounts are exempt under Del. Code tit. 10, § 4915. Rollover contributions are exempt for 60 days after distribution if contributed to a new retirement plan within that period.
The Delaware Code elsewhere specifically exempts several types of pensions, including:
- Del. Code tit. 11, § 8803: The Delaware County and Municipal Police/Firefighter Pension Plan.
- Del. Code tit. 16, § 6653: The Delaware Volunteer Firemen’s Pension Plan.
- Del. Code tit. 29, § 5503: The Delaware State Employees’ Pension Plan.
Where are the bankruptcy courts in Delaware?
Chapter 7 bankruptcy cases in Delaware are filed in the U.S. Bankruptcy Court for the District of Delaware. It has one location:
Street Address: 824 Market St. N., 3rd Floor, Wilmington, DE 19801
Telephone: (302) 252-2900