Choosing Between State and Federal Bankruptcy Exemptions

If you have a choice between the federal and state bankruptcy exemption systems, use the one that protects the most property.

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Your decision to use federal or state bankruptcy exemptions can determine how much property you are able to protect and keep in bankruptcy.  As a result, it’s important to make the correct decision if your state allows a choice between the two exemption systems.  Read on for tips on making the right choice when deciding between federal or state exemptions.

(To learn how exemptions work and why they are important in your bankruptcy case, see our Bankruptcy Exemptions area.)

Which States Allow You a Choice?

Most states require you to use state exemptions when you file for bankruptcy.  But certain states allow you to choose between federal and state bankruptcy exemptions. However, even if your state gives you a choice, you must pick one system or the other (you cannot mix and match).

Currently, the following states offer you a choice between federal and state exemptions: Alaska, Arkansas, Connecticut, the District of Columbia, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin.

Should I Choose Federal or State Bankruptcy Exemptions?

The answer depends on the amount and type of property you own as well as the specific exemptions of your state.  The federal bankruptcy exemptions are the same regardless of where you live.  However, each state has its own unique set of bankruptcy exemptions. 

Certain states have very generous exemptions for specific types of property (such as an unlimited homestead exemption) while others may offer little or no protection.  As a result, you need to choose the exemption system that allows you to protect the greatest amount of your property or the property that you most want to keep. 

To see the federal exemption amounts for various types of property, go to Federal Bankruptcy Exemptions.

To find the exemption amounts in your state, go to the Bankruptcy in Your State area and click on your state. If you use your state exemptions, you can also use the federal nonbankruptcy exemptions. To find those amounts, see Federal Nonbankruptcy Exemptions.

If You Have a Substantial Amount of Home Equity

If you own a house with a lot of equity, check the homestead exemption of your state when deciding whether to use federal or state exemptions.  The current federal homestead exemption is $22,975 for a single filer or $45,950 for married couples filing jointly. If the amount of equity you have in your home is greater than the federal exemption amount, your state may offer a better option.

For example, let’s say your house is worth $200,000 and you owe $75,000 on your mortgage. This means you have $125,000 of home equity.  If your state has a $150,000 homestead exemption, then the state exemption system will be a better choice for you (assuming you want to keep your home) because the federal homestead exemption is not enough to protect your house.

If You Own Property Not Covered By a Specific Exemption

If you have assets that are not covered by a specific exemption, you can use a wildcard exemption to protect them.  A wildcard exemption can be used for any type of property like cash or money in the bank.  It can also be added on top of existing exemptions if they are not enough to cover a particular asset.

The federal bankruptcy exemptions include a wildcard exemption of $1,225 plus up to $11,500 of the unused portion of the homestead exemption.  So you can potentially exempt up to $12,725 in any asset.  Some states offer more generous wildcard exemptions but others have none at all.  So if you have property that does not fit into any specific exemption, it might be more advantageous to use the system with the greatest wildcard exemption.

For example, if you have $10,000 in the bank you can exempt the entire amount using the federal wildcard exemption.  If your state does not have a wildcard exemption or a specific exemption for money in the bank then the federal exemption system is likely a better option for you.

When to Talk to a Lawyer

If you're not sure whether you can (or should) use the federal bankruptcy exemptions, or you need expert legal advice for your case, you may want to talk to a bankruptcy lawyer. You can find local bankruptcy attorneys here.

by: , Attorney

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