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Posted by: National Bankruptcy Forum
Hawaii is famous for being a tropical paradise. The only state in the United States made up entirely of islands, Hawaii is home to lush green rainforests, scenic beaches, and active volcanoes that attract tourists from the continental U.S. and around the world.
However, not all is as sunny in the Aloha State as its gorgeous tropical climate. Although the unemployment rate has been dropping, the state continues to have the highest rate of homelessness in the nation, and its economy is growing more slowly this year than last.
When Hawaiians become overwhelmed by money problems and surmounting debt, they can find relief in the U.S. Bankruptcy Code. The Bankruptcy Code provides debtors with a way to overcome financial difficulties. Many Hawaiians who file bankruptcy choose to do so under Chapter 7, enabling them to get a fresh start financially.
This post provides a general overview of Chapter 7 bankruptcy in Hawaii, but it can only scratch the surface of that process. Hawaiians thinking of filing bankruptcy should consult a Hawaii bankruptcy attorney for help that is tailored to their circumstances.
What is Chapter 7 bankruptcy?
The Bankruptcy Code defines several types of bankruptcy. Chapter 7 governs what are known as liquidation bankruptcies. In a Chapter 7 case, a bankruptcy trustee gathers a debtor’s non-exempt property and sells (i.e., “liquidates”) it. He or she then uses the sales proceeds to pay as much of the debtor’s unsecured debts as possible. When the case concludes, the court will discharge the debtor from liability for most such debts.
Importantly, the trustee’s authority only extends to non-exempt property. What property is exempt from liquidation depends on which state’s laws are used in a case. The Bankruptcy Code contains a list of exemptions, but allows states to create their own such lists. In addition, the states can require their residents to use those state exemptions, though many (including Hawaii) permit the debtor to choose which set of exemptions to apply.
Who can file for Chapter 7 bankruptcy in Hawaii?
The Bankruptcy Code contains two important provisions regarding (1) who can file for bankruptcy in Hawaii and (2) who can use Hawaii’s exemptions. The answers to those two questions are not always the same.
To file in Hawaii, a debtor must have lived there for most of the six months before filing. Otherwise, he or she will have to wait until that is true or file in the state where he or she lived for most of that period.
A more complicated test is used to determine who can apply Hawaii’s exemptions in a bankruptcy case. First, a court will ask whether the debtor lived in Hawaii for the entire two years prior to filing. If so, then Hawaii’s exemptions will apply. If not, the court determines where the debtor lived for most of the six months just before that two-year period and applies that state’s exemptions.
Example: Louise files for Chapter 7 bankruptcy in Hawaii on August 1, 2017. She moved to Hawaii from her home state of Delaware on January 1, 2017. Because she has lived in Hawaii for the entire six months before filing, she can file bankruptcy there. But because she has not lived there for two years, the court will apply Delaware’s exemptions in her case.
What are Hawaii’s bankruptcy exemptions?
Hawaii has not opted out of the federal exemptions included in the Bankruptcy Code. Consequently, Hawaii debtors can choose to use either the federal exemptions or Hawaii’s state-law exemptions. However, they cannot choose some state exemptions and some federal exemptions; they must use either all-state or all-federal exemptions.
Some of the most significant exemptions under both federal and state law are listed below. When an exemption lists a limit on value, that limit generally refers to the debtor’s equity in the property. Equity refers to the difference between the total value of property and any debts secured by it.
Example: Marcus owns a house in Hawaii worth $50,000, but he owes $30,000 on the mortgage. Therefore, Marcus’ equity in the house is $20,000, and he can exempt it from liquidation in a Chapter 7 bankruptcy.
If a debtor’s equity in property exceeds the limit on the exemption, then that property can be liquidated notwithstanding the exemption. However, in that case the debtor would be entitled to an amount of the proceeds from that liquidation equal to the exemption limit.
Example: Sam, who is younger than 65 and not a head of household, owns a house in Hawaii worth $50,000, but subject to a $15,000 mortgage. Because her equity in her home, $35,000, exceeds the exemption limit of $20,000, the home is not exempt. If the case trustee sells her home, however, she will be entitled to receive $20,000 from the sale.
A married couple that files bankruptcy jointly generally may each take the full amount of exemptions. This is known as “doubling” exemptions, and it is subject to exceptions, as noted below.
The federal exemptions can be found listed in 11 U.S.C. § 522(d), but the current value limits for those exemptions (as adjusted for inflation every three years) are found in a notice from the Judicial Conference of the United States.
Hawaii vs. Federal ExemptionsThe top 5 exemptions under Hawaii law compared to federal law.
|Type of exemption||Hawaii law||Federal law|
|Homestead||$30,000 if head of household or at least 65 years old; $20,000 for others||$23,675 of equity in principal place of residence|
|Personal property||All furnishings, appliances, and apparel reasonably necessary; tools of the trade; jewelry up to an aggregate value of $1,000||$12,625 aggregate value on household goods, plus federal wildcard exemption applicable ($1,250 plus $11,850 of any unused portion of your homestead exemption)|
|Wages||Wages and compensation for personal services rendered during the 31 days before a bankruptcy proceeding are exempt||Income you've earned but not yet received becomes part of your bankruptcy estate|
|Pension/retirement||Tax-exempt retirement plans, except for contributions made within three years of filing for bankruptcy||Exempt, with a cap of about $1.28 million on IRAs and Roth IRAs|
For debtors who are head of household or at least 65 years old, Hawaii exempts one parcel of real property up to $30,000. For others, the exemption is limited to $20,000. This exemption may not be doubled.
“Head of household” includes a married man and woman, an individual who resides on the real property and cares for certain relatives, and a “head of household” as defined in the Internal Revenue Code.
By contrast, the federal homestead exemption is limited to $23,675.
Hawaii exempts one motor vehicle up to a value of $2,575. To measure value, Hawaii requires using the wholesale used car price found in guides used by Hawaii motor vehicle dealers or, if no such price exists, the fair wholesale market value of the vehicle.
Federal law exempts one motor vehicle up to $3,775.
Other Personal Property
In addition to one motor vehicle, Hawaii also exempts the following personal property:
- All necessary household furnishings and appliances, books, and wearing apparel reasonably necessary to, and personally used by, the debtor or the debtor’s family who live with the debtor.
- Jewelry, watches, and other items of personal adornment up to an aggregate value of $1,000.
- Tools, implements, instruments, uniforms, books, equipment, one commercial fishing boat and nets, one motor vehicle, and other personal property used by the debtor in his or her trade, business, calling, or profession.
- A parcel of land in a graveyard up to 250 square feet in size.
- The proceeds of insurance on, and the proceeds from sale of, the above personal property, for six months after the proceeds are received.
In comparison, federal law exempts:
- Household furnishings, household goods, clothing, appliances, books, animals, crops, and musical instruments, up to an individual value of $600 and an aggregate value of $12,675.
- Jewelry to an aggregate value of $1,600.
- Implements, professional books, and tools of the trade, up to an aggregate value of $2,375.
Under Hawaii law, the debtor’s wages or other compensation due to the debtor for personal services rendered during the 31 days before the proceeding are exempt.
Under federal law, wages that are earned but not yet received are not exempt.
Hawaii exempts tax-exempt retirement plans from liquidation, except for contributions made within three years of when the debtor files for bankruptcy. A debtor who chooses the state exemptions may also use a special federal exemption provided in 11 U.S.C. § 522(b)(3)(C).
Federal law exempts such accounts entirely, but only exempts IRAs and Roth IRAs to a value of $1,283,025.
Where are the bankruptcy courts in Hawaii?
Chapter 7 bankruptcy cases in Hawaii are filed in the U.S. Bankruptcy Court for the District of Hawaii. It has one location:
Street Address: 1132 Bishop St., Ste. 250, Honolulu, HI 96813
Telephone: (808) 522-8100