When a person files bankruptcy, all of his property, both real and personal, becomes a part of the bankruptcy estate. However, under the Bankruptcy Code, debtors are allowed to exclude from the bankruptcy estate certain property deemed necessary for every day life and to facilitate a fresh start after discharge. A debtor accomplishes this exclusion by claiming allowable property as exempt on Schedule C of the Bankruptcy Schedules.
How Are Exemptions Determined?
Exemptions are provided under both state and federal law. State law determines which exemption scheme a debtor must use. Some states allow a debtor to use either the state or federal exemption scheme. While other states require a debtor to use the state exemptions. The following states allow debtors to choose either the federal or state exemptions:
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In states that allow both the federal and state exemptions, debtors must choose one or the other exemption schemes; they cannot use both. In the states that require debtors to utilize the state exemptions, there are still some federal exemptions which are available to debtors. Some states also have a wildcard exemption which can be used by a debtor to exempt any property. The federal exemptions also include a rather generous wildcard exemption.
Pre-Bankruptcy Planning
Federal exemptions vary from state exemptions. In jurisdictions that allow a debtor to choose between the state exemptions, it's important to understand how deciding which exemption scheme to utilize will impact your ability to make a fresh start. In Texas, for example, the state exemption scheme is generally believed to be more favorable to affluent debtors while the federal exemption scheme is generally viewed as being more favorable to low income debtors.
State exemptions vary from jurisdiction to jurisdiction. For example in Georgia, the exemption for an automobile is $3500. This seems like a fairly reasonable exemption amount, until you consider the automobile exemption in Texas which is much more generous. In Texas, the exemption for an automobile is unlimited for two, three, or four wheel vehicles for each family member who holds a driver's license or who does not hold a driver's license but relies on another person to operate the vehicle for the benefit of the non-licensed driver.
Residency and Venue Requirements
The Bankruptcy Code requires a debtor to file in the judicial district where the debtor's residence, domicile, principal place of business or principal assets have been located for the 180 day period immediately preceding the filing of the bankruptcy petition or have been located for the longest time during the 180 day period prior to the filing of the bankruptcy petition. However, some states prohibit a non-resident from using its exemptions. So, if a debtor lived in one state (which prohibits non-residents from utilizing its exemption scheme) for the majority of the 180 day period before he files, but at the time of the filing resides in a different state, he would have to use the federal exemptions.
Married Couples and Exemptions
In some jurisdictions, a married couple may be able to double the value of certain exemptions. The federal exemptions always allow married couples to double exemptions values.
Getting Legal Help
One of the biggest mistakes people make when they represent themselves in a bankruptcy is failing to use or misusing exemptions. This error can have devastating consequences. Therefore, its best to hire a qualified bankruptcy attorney who will carefully review your assets and formulate a strategy, including the careful application of the appropriate exemptions, that best protects those assets from your creditors and the bankruptcy trustee.
