Federal Non-bankruptcy Exemptions vs. State Exemptions

Although states can opt out of most federal bankruptcy exemptions, some are mandatory. These exemptions are available to everyone who is using his or her state’s exemptions, and are not available to anyone using the federal exemptions or the second California state option (which is very like the federal exemptions).

These exemptions are called non-bankruptcy exemptions, because they are found in areas of the United States Code other than the Bankruptcy Code. All of the bankruptcy exemptions are complete exemptions, not exemptions of a specified amount, except for the provision that at least 75% of wages will be exempt. If your state also specifies that a certain percentage of wages will be exempt, you don’t get to add the percentages together. You can choose whichever amount is higher.

Click here to read an Introduction to Bankruptcy Exemptions.

Case Studies: Federal Non-Bankruptcy Exemptions vs. State Exemptions

Case Study 1: The Texas Homestead Exemption

In Texas, an individual filing for bankruptcy can take advantage of the generous homestead exemption. For instance, John, a resident of Texas, owns a home with substantial equity. By utilizing the Texas homestead exemption, John can protect a significant portion of his home’s value from creditors. As a result, he can retain ownership of his primary residence and find financial stability during and after the bankruptcy process.

Case Study 2: The Federal Wildcard Exemption

In some states with limited wildcard exemptions, individuals like Sarah, who reside in such states, may choose to utilize the federal wildcard exemption. Sarah, facing bankruptcy, owns valuable personal property that exceeds the state’s exemption limits. However, by invoking the federal wildcard exemption, Sarah can protect her assets that would otherwise be vulnerable to liquidation by the bankruptcy trustee. This allows her to retain ownership of her cherished possessions and regain financial stability.

Case Study 3: Retirement Account Exemption Variations

Consider the case of Michael, who is facing bankruptcy and has a substantial balance in his retirement account. The level of protection for retirement accounts varies from state to state. In California, for instance, retirement accounts are generally fully exempt, safeguarding Michael’s savings from being used to repay creditors.

However, in another state with more limited exemptions, such as New York, only a portion of the retirement account may be exempt. This discrepancy underscores the importance of understanding the variations between state exemptions and the potential impact on one’s financial security during bankruptcy.