Key Points

  • State laws tend to address the contracts that qualify for bankruptcy protection, whereas the Federal Bankruptcy Code addresses the process.
  • Bankruptcy filings are subject to federal laws, which dictate whether individuals can qualify to file Chapter 7 or 13 bankruptcy.
  • States can opt-out of the federal bankruptcy exemptions, in some cases giving you the option of choosing either the state or federal protections.
What are the Differences Between State and Federal Bankruptcy and Which You Should Choose

The US Bankruptcy Code evolved over the last century, with the most recent amendment occurring in 1994. Federal bankruptcy laws create uniformity across state lines and establish a standard for all bankruptcies filed in the US.

State laws address the process used for creditor contracts, promissory notes, medical debts, and other contracts. States also establish a statute of limitations and other protections limiting the timeframe a creditor may bring legal action to resolve a delinquent debt. Each state also retains jurisdiction over credit issues that do not conflict with federal laws and areas not addressed by the federal statutes.

When the federal law addresses and creditor issue, the federal code supersedes the states.

What Are Bankruptcy Exemptions and Why Are They Important?

The Federal Bankruptcy Code strives to balance the creditor’s right to receive repayment of monies owed and protection for a debtor facing financial hardship. The bankruptcy code provides debtors a fresh start by discharging debts and allowing you to retain certain assets such as a home, vehicle, and common household goods.

Chapter 7, also called liquidation bankruptcy, requires you to sell non-exempt assets and distribute the proceeds to creditors before debts will be discharged. Chapter 13 requires you to make repayment on a portion of your debts, but lets you keep more possessions.

Exemptions are critical because it protects assets in the bankruptcy process.

Federal Chapter 7 Bankruptcy Exemptions

The Federal Bankruptcy Code protects the following property from creditors:

  • Homestead exemption allows you to keep up to $25,150 of equity in your home.
  • A car valued up to $4,000.
  • $1,700 worth of Jewelry.
  • $13,400 in household goods such as furniture, appliances, and clothing.
  • $2,525 in tools of the trade, which could include books, tools, or equipment needed for employment.
  • Health aids such as glasses, hearing aids, or wheelchairs.
  • $13,400 of the value of a life insurance contract, or accrued interest or dividends.
  • Most retirement accounts with preferred tax treatment, including up to $1,362,800 in IRA balances.
  • The wildcard exemption allows you to keep another $1,325 and $12,575 of an unused portion of the homestead exemption.

The bankruptcy law also protects income from alimony, life insurance contracts, social security, unemployment, veterans’ benefits, disability payments, and public assistance.

Congress adjusts the exemption amounts for inflation every three years. The last adjustment occurred on April 1, 2019. The dollar amounts listed apply to single filers. A couple who files for bankruptcy jointly will receive double the listed exemption amounts. Exemptions without a dollar value will exempt the full value of the asset.

Federal Nonbankruptcy Exemptions

Nonbankruptcy exemptions are additional property or income you can retain for those who qualify. A few examples include:

  • Retirement benefits for qualified service (mostly federal employees) and Social Security recipients.
  • Death and disability benefits
  • Survivors’ benefits for qualified service
  • Military group life insurance payouts
  • 75% of wages earned but not yet paid

State Chapter 7 Bankruptcy Exemptions

The Federal Bankruptcy Code allows states to override federal exemptions. If your state did not opt out of federal bankruptcy exemptions, you must follow the federal guidelines.

Some states require the use of state exemptions, and others let you choose the exemptions that are most beneficial to you. State exemptions are often more generous than the federal.

When using state exemptions, you might also qualify to use the federal nonbankruptcy exemptions to protect more assets. In the states that allow the use of federal bankruptcy exemptions, you do not qualify for federal nonbankruptcy exemptions.