Bankruptcy -State or Federal?

Federal rules govern bankruptcy eligibility, debt coverage, and property retention. Federal “exemptions” govern bankruptcy property handling.  Exemptions affect how much you must pay creditors in a Chapter 13 bankruptcy and how much property you can keep in Chapter 7.  Exemptions like these allow a debtor to start over and prevent the state from providing for their fundamental requirements.  

The federal homestead exemption preserves certain equity in your primary dwelling. As of April 2013, federal exemptions for personal property include $3,675 for your motor vehicle, $1,550 for jewelry, and $12,250 for household goods, furniture, clothes, books, etc. (up to $757 per item). Help from a bankruptcy attorney is always advised.

State exempts

States can opt out of federal exemptions but not federal bankruptcy legislation.  Understand your state’s exemptions before filing for bankruptcy.  Eighteen states, including Alaska, Hawaii, Texas, Michigan, Minnesota, New York, most New England states, and the District of Columbia, let you pick between federal and state exemptions.  You must choose one or the other entirely, not some federal and some regional exemptions.  All other states, especially Florida, have replaced federal exemptions with state-specific ones.

State exemptions vary widely. Most states provide homestead exemptions, however, exemption values vary widely. Like federal exemption legislation, Missouri limits homestead exemption equity to $8,000. Iowa limits its homestead exemption by acreage. Florida has no homestead exemption restriction.  Thus, a qualified bankruptcy lawyer in your state will know what exemptions are allowed, whether to choose state or federal exemptions and how to protect your property during bankruptcy best.

Some people try to move to a state with more favorable exemption laws before filing for bankruptcy.  The Uniform Fraudulent Conveyances Act and its replacement, the Uniform Fraudulent Transfer Act, penalize and restrict this type of property transfer in several states.

Bankruptcy “Means Test”

Your state of residence determines whether you qualify for Chapter 7 bankruptcy or how long your Chapter 13 repayment plan will remain.  The means test begins by determining if your income exceeds the state median.  Chapter 7 bankruptcy is available to low-income people.  If your salary is above the median, deduct “allowed” monthly spending to see if you can pay off unsecured debts like credit cards.  If so, file for Chapter 13 bankruptcy.  Before filing for bankruptcy, consult a bankruptcy attorney who knows your state and county’s median income and authorized expenses.

Procedure laws

Finally, bankruptcy laws are federal, but procedural laws and filing regulations vary by state and even by court.  Thus, a knowledgeable bankruptcy attorney will help you through your state, county, and/or municipality’s complicated processes and filing requirements.

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