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Exemption from bankruptcy

Bankruptcy law can be quite confusing at times. This is because bankruptcy laws are made up of state as well as federal laws. Selecting the correct bankruptcy exemptions and using them to your benefit can be a challenging task. Although the federal government has the power to enact laws, it also empowers the states to decide about bankruptcy exemptions. Exemptions may vary from one state to another. The laws which protect your property from creditors are referred to as exemptions.

Are you eligible for state exemptions or federal exemptions?

Few states have developed their own exemptions and replace the federal exemptions completely. There are a couple of states that offer a choice between state exemptions as well as federal exemptions. For instance, California will offer you a choice to choose between federal exemptions and state exemptions. However, these exemptions are under the jurisdiction of the California state law.

You can use either state exemptions or federal exemptions. You cannot use both exemptions simultaneously. The following states allow you to choose between state exemptions and federal exemptions.

  • Arkansas
  • Connecticut
  • Hawaii
  • District of Columbia
  • Michigan
  • Massachusetts
  • Minnesota
  • Pennsylvania
  • New Jersey
  • New Mexico
  • Rhode Island
  • Texas
  • South Carolina
  • Vermont
  • Washington
  • Wisconsin

Just as federal exemptions are different from state exemptions, state exemptions in turn differ from one another. For example, the maximum exemption limit for a car in Texas can be up to USD$30,000. On the contrary, maximum exemption limit in Florida is USD$1,000. In some states, the court appointed trustee cannot take away your home no matter how expensive it is. The same may not be true for another state and the protected value of the house may not exceed even USD$10,000.

What are the residency requirements for bankruptcy exemptions?

In order to avail bankruptcy exemptions, you are also required to fulfill residency requirements. As per the new federal bankruptcy laws that were introduced in October 2005, residency requirements have also undergone changes. It was observed that people intending to file bankruptcy were moving to states where they could avail exemptions according to their convenience. In order to put a stop to such activities, the government introduced the residency requirements.

So, you should have lived for at least 2 years in a particular state to use the exemptions of that state. If you haven’t lived for 2 years, you have to use exemptions of the state you were residing in prior to your current state of residence. There are a couple of states that don’t permit you to use their exemptions unless you are currently residing in that state. Under such circumstances, you have to use federal exemptions. If you haven’t lived in a particular state for 2 years, you can use federal exemptions after 91 days, provided the state in which you are filing bankruptcy permits you to do so.

Choosing between state and federal exemptions

You choose exemptions depending on the property you value most. For instance, if you don’t want to lose your home, you concentrate on homestead exemptions. If the state in which you reside offers larger homestead exemption, you can use state exemptions else you can use federal exemptions, whichever works better for you.

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