Federal Bankruptcy Laws

Article 1, Section 8 of the US Constitution grants Congress the power “to establish … uniform Laws on the subject of Bankruptcies throughout the United States”.  When we hear people talk about “Chapter 7”,”Chapter 11” and “Chapter 13”, they are referring to federal bankruptcy laws, passed by Congress as part of its responsibility to help to maintain uniformity among the states, encourage interstate commerce, and promote the country’s economic stability.  These federal laws regulate who can file for bankruptcy, which debts can be covered by a bankruptcy proceeding, and what property can or cannot be kept when going through bankruptcy proceedings.

Federal laws include are what are commonly known as “exemptions”, which define how property is handled during bankruptcy proceedings.  In a Chapter 7 bankruptcy, exemptions allow you to keep a certain amount of property, while in a Chapter 13 bankruptcy, exemptions help determine how much you must pay certain creditors as part of your bankruptcy repayment plan.  These exemptions allow a debtor to make a fresh start and ensure that the debtor does not emerge from bankruptcy totally destitute (thus relieving the state of the burden of providing for the debtor’s basic needs).   For instance, the federal homestead exemption protects some of the equity in your primary place of residence.  Federal exemptions also include personal property, up to a certain limit, such as (as of April 2013) $3,675 for your motor vehicle, $1,550 for jewelry, and $12,250  for household goods, furniture, clothes, books, etc. ( up to $757 per individual item).

State Exemptions

While individual states cannot override federal bankruptcy laws, states do have the right to opt out of, or override these federal exemptions.  Thus, when beginning any bankruptcy proceeding, it is crucial to understand the exemptions permitted in your state.  Eighteen states, including Alaska, Hawaii, Texas, Michigan, Minnesota, New York and most New England states, as well as the District of Colombia, allow you to choose whether you wish to use federal or state exemptions.  However, you must choose one or the other in their entirety, not pick some federal and some state exemptions.  All other states, including Florida, have chosen to opt out of the federal exemptions, replacing them with their own state-specific exemption laws.

There is wide variation in the exemptions permitted by each state.  For instance, while homestead exemptions are common in most states, the specific values permitted under exemption laws vary drastically.  For example, Missouri, like federal exemption laws, places a dollar limit on the amount of equity protected under its homestead exemption, but places that amount at only $8,000.  Iowa caps its homestead exemption on acreage, not dollar value.  Florida, on the other hand, does not place any limit on the homestead exemption.  Thus, a qualified bankruptcy attorney in your state (such as ROBERT H. PFLUEGER in Florida) will understand what exemptions are permitted, whether to choose state or federal exemptions if such a choice is available, and ensure that your property is protected to the fullest extent possible during a bankruptcy proceeding.

Because of the wide variation in state exemption laws, some people may attempt to change their state of residency or transfer their property to another state in advance of a bankruptcy proceeding to take advantage of more lenient exemption laws.  To prevent this, many states have adopted laws, such as the Uniform Fraudulent Conveyances Act or its successor, the Uniform Fraudulent Transfer Act, which seek to criminalize this behavior and prevent property transfer of this type.

The Bankruptcy “Means Test”

Your state of residency is also crucial when it comes to determining if you qualify for Chapter 7 bankruptcy (when your debts are liquidated) or how long your repayment plan will last if you must use Chapter 13 bankruptcy.  At its most basic level, the means test starts with a determination of whether your income is more or less than the median income in your state.  If your income is less than the median, you can file under Chapter 7 bankruptcy.  If your income is more than the median, the next step is to determine whether your income is great enough to repay unsecured debts like credit cards after subtracting “allowed” monthly expenses.  If it is, then you must file for Chapter 13 bankruptcy.  Because median income levels vary widely by state and household size, and because the means test takes into account each county and metropolitan region’s allowed expenses, it is crucial that you work with a bankruptcy attorney knowledgeable about your state and county before filing for bankruptcy.

Procedural Laws

Finally, although bankruptcy laws are federal by nature, procedural laws and filing rules vary from state to state, and even from court to court within the same state.  Thus, a qualified bankruptcy attorney will help you navigate through the complex procedures and filing requirements dictated by your state, county, and/or municipality.  If you live in Orlando, Florida, contact Robert Pflueger at Orlando Bankruptcy Law (407-339-2022 or info@orlando-bankruptcy-law.com) for the best possible advice on how to approach the complicated world of bankruptcy.