Federal Vs. State Exemption for Chapter 7

By Tom Streissguth

In a Chapter 7 bankruptcy, you ask a federal court for protection from creditors. The court issues an automatic stay, which bars any collection actions or lawsuits against you. The law requires you to provide a list of all your property, including homes, cars, cash, investments, jewelry and other valuables, furniture, and business supplies. A court-appointed trustee may seize some of your property, depending on the type of debt in need of repayment. Federal law provides exemptions that allow you to protect some of your property from seizure. In addition, the states have their own rules regarding exempt property.

Federal Exemptions

Chapter 522 of the federal bankruptcy code provides for specific exemptions from seizure in bankruptcy. These apply to debtors in bankruptcy anywhere in the United States, and as of 2012 include $21,625 of equity in your personal residence, also known as the homestead exemption. Other important exemptions include $3,450 of equity in a car, and an aggregate $11,525 in furniture, books, clothing and other household goods for personal use -- $550 in value for any single item. A bankruptcy court may not revise these exemption amounts for any particular debtor or case; however, a creditor may move to lift the exemption on a specific item under certain circumstances.

State Exemptions

States also have their own exemption schedules. Alabama, for example, requires that bankruptcy filers use the state schedule and limits the homestead exemption to $5,000, as of publication date. In Delaware, the 2012 homestead exemption stood at a much more generous $125,000. State legislatures revise the exemptions regularly and, in some cases, amend the laws to allow use of federal exemptions. If you are researching exemptions, ensure that you are reviewing the most current information; to double-check, contact a bankruptcy attorney or the clerk of the nearest federal bankruptcy court.

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Selecting Exemption Schedules

Some states allow bankruptcy filers to choose between state and federal exemptions in bankruptcy. As of 2012, this list included Arkansas, Connecticut, District of Columbia, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Pennsylvania, Rhode Island, Texas, Vermont, Washington and Wisconsin. The rest require you to use the state's exemptions, which may vary as either more or less restrictive than the federal schedule. No states require you to use the federal exemption schedule.

Wildcard Exemption

The "wildcard" exemption allows you to exempt assets of your choosing, up to a specified value. As of the publication date, the federal wildcard exemption stood at $10,825 of homestead value, in addition to the amount already allowed for your homestead by law, and in addition to $1,150 of any other property, including cash or investments. State exemptions vary; for example, there is no wildcard exemption allowed in Hawaii, while Indiana allows a wildcard exemption up to $9,350 in any combination of assets or property.

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