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The declaration of bankruptcy allows debtors to solve significant financial debts after their non-exempt assets are distributed. Bankruptcy in the United States falls under Federal jurisdiction by the United States Constitution (Article 1, Section 8).
However, bankruptcy is implemented as statute law, and relevant statutes are incorporated within Bankruptcy Code of Title 11 of the United States Code. At present, two forms of filing bankruptcy are available to individuals: Chapter 7 and Chapter 13. Chapter 7 bankruptcy is a liquidation of assets, while Chapter 13 involves a reorganization by which the debtor creates a three- to five-year payment plan.
Although bankruptcy cases are filed in the United States Bankruptcy Court, they are often highly dependent upon state laws. Hawaii is one of the thirteen states in the U.S. that offers a choice between federal and state bankruptcy laws. Declaring bankruptcy is an important decision and quite complicated in its implementation. Hiring an attorney with experience in the field concerned is generally recommended.
An exemption in bankruptcy allows a debtor to keep certain property or assets even after bankruptcy is filed. The exemptions are defined by statute and exempt property cannot be seized or sold to satisfy the debts of the person filing for bankruptcy.
Who Can File a Bankruptcy Exemption?
Any individual who files for bankruptcy can file for bankruptcy exemptions. Exemptions are available for chapter 7 and chapter 13 bankruptcy filings, but the exemptions vary from state to state.
Do All States Have the Same Exemptions?
No. Federal Bankruptcy law gives discretion to each state to determine which assets a debtor is allowed to keep when a bankruptcy case is filed. A state can allow a debtor to choose between federally created exemptions, defined in 11 U.S.C. 522 (see federal exemptions), or state created exemptions, or a state can opt to allow a debtor to choose only the state created exemptions. A debtor is allowed to use the exemptions from only one statute, either the federal or the state, but not both. For states that provide more than one exemption statute or system, the debtor is allowed to use the exemptions from only one statute.
What Is an Exemption Limit?
An exemption limit applies to any equity you have in property and limits the amount of equity that is exempt. Equity is the difference between the fair market value of the property and the unpaid balance on the property. For example, a home valued at $500,000 with a loan of $450,000 has an equity value of $50,000. If the state's homestead exemption is $50,000 or greater, the debtor would be exempt from liquidating the $50,000 equity in the home to pay off the debts.
Which States Allow Both Federal and State Created Exemptions?
The following states allow a debtor to choose either federal or state created exemptions. The debtor can choose only one (federal or state). Arkansas, Connecticut, The District of Columbia, Hawaii, Massachusetts, Michigan, Minnesota, New Jersey, New Mexico, Pennsylvania, Rhode Island, South Carolina, Texas, Vermont, Washington, and Wisconsin. All states not listed above have opted not to allow its residents to utilize the federal exemptions, so each state has its own statutes which define and list the exemptions.
Do I Need a Bankruptcy Lawyer?
Bankruptcy is a very complicated process and it is vital to know each state's bankruptcy law. Each state allows different exemptions and filing an exemption incorrectly can lead to that property being seized, even if the property would have been exempt had the exemption been done correctly. A bankruptcy lawyer knows the ins and outs of filing for bankruptcy, and can recommend what chapter of bankruptcy is right for you. A bankruptcy lawyer can also ensure that your exemptions are filed correctly.
Only debtors whose monthly income is higher than the median income of their state, as calculated by the Code, are subject to being found abusive. Debtors whose income falls below the median income figure may be in violation of the means test, however no party is permitted to file a motion in order to find abuse. This creates a means test "safe harbor" for debtors below the state's median income figure.
If you have excessively valuable household goods, you will have to find an appropriate exemption category to protect them or you may lose them. If your property is not worth much, or if the trustee decides that it may be difficult to efficiently sell, he may abandon the asset and allow you to keep it, even if it is technically over the exemption limit.