Filing for Bankruptcy: Federal Exemptions

Bankruptcy is a last resort for those facing financial turmoil. State and federal laws are in place to offer relief from a life out of control; whether it be debt reconstruction through Chapter 13, or debt cancellation through Chapter 7 bankruptcy. In the latter case, debt cancellation can also mean liquidation. Foreclosure and item repossession are some of the many byproducts of Chapter 7. Don’t lose hope, however: filing for bankruptcy does not mean forfeiting all your possessions. Several states have begun offering federal exemptions in lieu of state exemptions. This means that you can assess your needs and choose which exemptions to take after filing for bankruptcy. States that allow this option include:

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

If you choose to go the federal route, the following benefits and items are protected:

  • Homestead value: Property worth up to $17,450. If no property exists, $8725 may be applied to other personal items.
  • Insurance
    • Disability
    • Illness
    • Unemployment benefits
    • Funds to pay for life insurance (in cases where the debtor has dependents who will rely on the policy)
    • Life insurance including dividends and interest, up to $9,300
  • Pension: Funds protected under the Employee Retirement Income Security Act (ERISA)
  • Crime victim benefits
  • Public benefits
    • Social Security
    • Unemployment compensation
    • Veterans’ compensation
  • Funds to pay alimony or child support
  • Funds accepted as alimony or child support
  • Personal injury benefits valued up to $17,425
  • Wrongful death benefits
  • Personal property valued up to $9,300. Items may include:
    • Animals
    • Clothing
    • Books
    • Furniture
    • Household items
    • Musical instruments (valued up to $425)
    • Jewelry (valued up to $1,150)
    • Cars (valued up to $2,775)
  • Employment supplies such as tools and books valued up to $1,750 (i.e., “tools of the trade”)
  • Miscellaneous property
    • $925 allowance for any items
    • Use of the remaining $8725 homestead exemption

Even if your state does not allow federal exemptions when filing for bankruptcy, state exemptions often include the majority of the components listed above. The bottom line: although bankruptcy is difficult, you won’t lose the shirt off your back. Take a closer look at your state’s laws to discover the options available to you. Education can help streamline the bankruptcy process, offering small comforts along the way.

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