Protecting Property When Filing Chapter 7 Bankruptcy Differs By State

When filing for Chapter 7 bankruptcy, one of the major concerns for filers is the protection of their property from being sold off to pay creditors. The extent to which property is protected in Chapter 7 bankruptcy largely depends on state-specific exemption laws, as well as federal bankruptcy exemptions. States differ significantly in how they approach exemptions, leading to variations in what property filers can keep through the bankruptcy process.

State vs. Federal Exemptions

• State Exemptions: Each state has its own set of exemption laws that determine what types of property and the amount of equity in that property are protected from creditors in a bankruptcy case. These can include exemptions for a primary residence (homestead exemption), personal property, vehicles, tools of the trade, retirement accounts, and more. The specifics and amounts of these exemptions vary widely from state to state.
• Federal Exemptions: In addition to state exemptions, there are federal bankruptcy exemptions outlined in the U.S. Bankruptcy Code. These exemptions cover similar categories of property but with different protected amounts.
• Choosing Between State and Federal Exemptions: Some states allow filers to choose between using state exemptions or federal bankruptcy exemptions, while others require filers to use only the state’s exemption system. The choice between state and federal exemptions can significantly impact what property a filer can keep.

Examples of Variations in Exemptions

• Homestead Exemption: This is one of the most significant differences among states. For example, states like Florida and Texas offer unlimited homestead exemptions, meaning that no matter how much your home is worth, it can be protected in bankruptcy. In contrast, other states may offer much lower homestead exemptions or limit the exemption to a certain amount of equity in the property.
• Personal Property: States also vary in the types and amounts of personal property that can be exempted, including clothing, jewelry, tools of the trade, and even cash or bank account balances.
• Vehicles: Exemption amounts for vehicles also differ. Some states allow a few thousand dollars in equity to be exempted, while others may offer more or less.
• Wildcard Exemptions: Some states have a “wildcard” exemption that can be applied to any property. The amount and flexibility of wildcard exemptions vary, providing an additional tool for protecting property not covered by other specific exemptions.

Strategy and Planning

Given the variations in exemption laws, deciding where and when to file for bankruptcy can be a strategic decision, especially for those who have recently moved or plan to move. The applicable exemptions are generally determined by where you have lived for the majority of the 180 days before the two years preceding your bankruptcy filing. This rule prevents people from moving to a state with more favorable exemptions just before filing for bankruptcy.

The protection of property in Chapter 7 bankruptcy is a complex area influenced by a patchwork of state and federal laws. The differences in state exemption laws can significantly impact what property you’re able to keep if you file for bankruptcy. It’s crucial for potential filers to consult with a knowledgeable bankruptcy attorney who understands the specific exemptions available in their state and can provide advice tailored to their unique situation. This guidance is essential for maximizing the protection of assets during the bankruptcy process.