Exploring State-Level Bankruptcy Law: Who Makes The Rules?

While bankruptcy is a federal system of law in the US, with the United States Bankruptcy Code (title 11, United States Code) and the Federal Rules of Bankruptcy Procedure, state law does play a role in some areas. For instance, states set their own property exemption laws, which determine what assets can be protected in Chapter 7 bankruptcy. This means that the specific bankruptcy exemptions available differ between states. Therefore, it is important to consult a lawyer experienced in bankruptcy in their state.

Bankruptcy is a federal law, but state law plays a role

Bankruptcy is governed by a set of federal laws in the United States, which means that the procedures and rules are largely the same across all states. However, state laws do play a role in certain areas of bankruptcy, and it is important to understand the specific laws in your state if you are considering filing for bankruptcy.

One area where state law comes into play is in determining property exemptions. Each state has its own set of exemption laws that outline the property you can protect during bankruptcy proceedings. These laws vary widely between states, and it is crucial to review them to understand the assets you may be able to keep or may need to give up. For example, while all filers typically retain essential items such as household furnishings and some home and car equity, luxury items like valuable collections and recreational vehicles are rarely protected.

State law also influences the eligibility requirements for Chapter 7 bankruptcy. The means test for Chapter 7 involves comparing your income to your state's median income, which can vary significantly from state to state. Additionally, in states that allow tenancy by the entirety, a home jointly owned by a married couple may be shielded from one spouse's bankruptcy, though this is subject to certain limitations.

It is worth noting that federal law may also expand exemptions in certain cases. For instance, federal law protects certain retirement accounts, such as ERISA-qualified accounts, up to a certain dollar amount per person. This amount is subject to periodic adjustments. Furthermore, individuals filing for bankruptcy may choose to use federal bankruptcy exemptions instead of state exemptions, depending on the state.

When considering bankruptcy, it is essential to consult a lawyer experienced in bankruptcy in your state. They can provide specific guidance on the applicable laws, exemptions, and resources available to you, such as approved counseling agencies and local bankruptcy forms. Understanding both the federal and state bankruptcy laws is crucial to making informed decisions about your financial situation.

Property exemptions vary between states

When filing for bankruptcy, you are allowed to keep some of your assets. Bankruptcy exemption laws allow filers to "exempt" or protect property needed to work and live. However, the specific assets you can protect vary depending on the state in which you reside. While all filers retain essential items, such as household furnishings, some home and car equity, and a retirement account, exemptions vary widely between states. For example, some states allow filers to choose between state and federal bankruptcy exemptions, while others require filers to use state exemptions only.

The type of bankruptcy you file will also impact which assets you can protect. In a Chapter 7 bankruptcy, you will lose any property not covered by an exemption, while in a Chapter 13 bankruptcy, you can keep all your property but must pay your creditors for any nonexempt assets through your repayment plan. Additionally, some exemptions allow filers to keep property regardless of its value, such as prescribed health aids and government benefits like Social Security.

It is important to note that luxury items like valuable collections, recreational vehicles, and rental properties are rarely protected by bankruptcy exemptions. As a result, it is crucial to review your state's specific exemption laws to determine which assets you can protect when filing for bankruptcy. The exemption laws will outline the specific property you can exempt, and reviewing them is the only way to know if you will lose or need to pay to keep certain assets.

While federal bankruptcy exemptions do exist, your state decides whether you can use these exemptions or if you must use state exemptions. Some states allow filers to choose between the two, while others mandate the use of state exemptions only. Therefore, it is essential to understand the bankruptcy laws and exemptions specific to your state when considering filing for bankruptcy.

State-specific resources are needed when filing for bankruptcy

While bankruptcy is governed by federal law, state-specific resources are essential when filing for bankruptcy. This is because there are different types of bankruptcy, and one may be better suited to an individual's circumstances. For instance, individuals may file for Chapter 7 or Chapter 13 bankruptcy, depending on their situation. Chapter 7 involves liquidating assets to pay off debts, whereas Chapter 13 is a repayment plan for individuals with regular incomes, allowing them to keep their property while paying off debts over 3 to 5 years.

Chapter 11 bankruptcy, a more complex option, is usually for corporations, but individuals can also file for it. Under this chapter, the debtor typically retains their assets and continues operating their business while working on a creditor repayment plan. Chapter 12 is a simplified reorganization option for family farmers and fishermen, allowing them to keep their property and work out a repayment plan.

State-specific resources are crucial in understanding the nuances of these different bankruptcy chapters and their applicability. For example, while bankruptcy laws are federal, each state has its own exemption laws that outline the property an individual can protect during bankruptcy. These exemptions vary widely between states, and reviewing them is essential to determine which assets an individual might lose or need to pay to retain. Some states, like California, provide self-help guides and resources for individuals considering bankruptcy. These guides offer basic information on bankruptcy types and direct individuals to local bankruptcy court websites for further details.

Additionally, state-specific resources can assist in finding a bankruptcy lawyer with expertise in the relevant state laws. Bankruptcy is a complex and specialised area of law, and seeking advice from a qualified lawyer is strongly recommended. State-specific resources can help individuals locate legal aid or pro bono services if they cannot afford a lawyer. These resources are invaluable in navigating the bankruptcy process, understanding one's rights, and making informed decisions about filing for bankruptcy.

State laws determine what assets can be protected

When it comes to bankruptcy, there are federal and state laws that outline what assets are protected. These laws are designed to protect personal property and keep those in debt afloat. While federal bankruptcy exemptions are typically used, state exemptions may be more beneficial for those with a lot of equity in their homes. This is because some states offer an unlimited homestead exemption, which allows you to keep your home entirely.

The amount and kind of property you can claim depends on the state. Some states offer a choice between using federal or state exemptions, while others require filers to use state exemptions. It's important to review your state's exemption laws to understand what property you can protect. These laws will outline which assets you can keep and how much you can claim for them.

In a Chapter 7 bankruptcy, assets can be sold to pay unsecured creditors, but a trustee must pay the allowed exemption first. If the exemption covers the equity in an asset, a trustee is less likely to sell it as it won't generate money for creditors. In a Chapter 13 bankruptcy, no assets are sold, but if an asset is not exempt, the debtor must pay into the plan an amount a Chapter 7 trustee would have received.

Federal law may expand exemptions

The federal bankruptcy exemption limit for IRAs and Roth IRAs is $1,512,350. Retirement accounts that are exempt from taxation are fully exempt in bankruptcy. The federal wildcard exemption can be applied to any property owned by the filer. As of April 1, 2022, $1,475 plus $13,950 of any unused portion of the homestead exemption is available to exempt any property of the filer's choosing.

The homestead exemption protects the ownership interest in the home in which the filer resides. The federal homestead exemption is $27,900. If the filer has more equity in their house, they can check their state homestead amount, which might be more generous. If the exemption doesn't include a dollar amount, the filer can keep the entire asset regardless of its value. If the filer and their spouse file for bankruptcy jointly, they can double the exemption amount on any property they own together.

The debtor is permitted to exempt certain property from the property of the estate. Property may be exempted even if it is subject to a lien, but only the unencumbered portion of the property is to be counted in computing the "value" of the property for the purposes of exemption.

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