Some people are under the impression that filing a personal bankruptcy will wipe out all debts, leaving them completely free of any financial commitments.  While it is true that filing for bankruptcy under either Chapter 7 or 13 of the U.S. Bankruptcy Code is a common way of dealing with financial problems, including overwhelming debt, angry creditors, and wage garnishment, it will not erase all your debts unless they are all eligible for discharge.  Therefore, in order to maximize the benefit of filing for bankruptcy, it is important to understand and implement any the federal bankruptcy exemptions that are available to you.  Speaking to a qualified bankruptcy attorney will help you understand what they are and whether they can be applied to your individual bankruptcy petition.

The bankruptcy process is relatively straightforward, unless you have complex ownership agreements of property and assets, or there are creditors who oppose your petition.  Generally speaking, it is always best to consult a financial advisor or attorney to ensure that bankruptcy is the best solution for your financial situation.  They will also be able to explain the bankruptcy process to you and help you decide whether to file under Chapter 7 or 13, or possibly Chapter 11.  Chapter 7 is the traditional concept of liquidation bankruptcy where assets are sold in order to pay off creditors and debts are discharged upon finalization of the bankruptcy.  Chapter 13, on the other hand, is a repayment plan that takes place over 3-5 years where you commit to paying off a percentage of the debts owed and at the end of the repayment plan, if it has been adhered to correctly, the judge will discharge the remaining amount of eligible debts.  Finally, Chapter 11 is usually used by businesses in financial trouble, but can be applicable to those individuals with excessive secured debts, such as multiple mortgages.

Since petitions of bankruptcy are handled by the Federal Bankruptcy Court and the law is ruled by the Federal U.S. Bankruptcy Code, matters of bankruptcy are dealt with similarly across the nation.  That being said, there are only 17 states that allow the use of federal bankruptcy exemptions.  These states are:

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

Generally speaking, you determine the state you use for your exemptions based on your residence for the 730 days (2 years) before filing for bankruptcy, or the state where you lived the majority of the 180 day period preceding the 2 year period.  If, based on those criteria, you are ineligible for any exemptions then you will be allowed to choose the federal exemptions.  For the list of 17 states listed above, you must have lived in one of them for at least 91 days before filing your bankruptcy petition, in order to be able choose whether to use the state or federal bankruptcy exemptions.

It is important that you compare the differences carefully as it may be more advantageous for your individual situation to opt to use the state exemptions.  This will depend on the type of debt you have, the type of property you own, your assets, etc.  In addition, your marital status may also play a role in which you choose to use as the federal bankruptcy exemptions can be doubled by a husband and wife if they are filing together.

The list of federal bankruptcy exemptions is a long one and is updated annually.  A full list can be obtained from your lawyer or your local bankruptcy courthouse, as the following items are only the major ones.

In addition, it is important to note that any pension or retirement plans will not be lost in bankruptcy.  They are exempt up to $1,095,000.  Your 401K will remain untouched by the court-appointed trustee and creditors will not be able to have access to those funds in order to be paid off.  For this reason it is important not to withdraw money from it in order to try and keep on top of your bills if you are seriously considering filing a personal bankruptcy petition.

Education funds placed in a named education account or qualified state tuition program are also exempt from seizure, as long as they were deposited at least 1 year to the bankruptcy filing.  There is no limit to the amount in the account, however, there is a $5,000 limit placed on amounts contributed between 1-2 years before the filing.  It must also be designated for use by the debtor or the child or grandchild of the debtor.

During the process of your personal bankruptcy and following the finalization of it and discharge of debts, you will continue to receive the following funds, as applicable to your situation:

•    Social Security benefits
•    Unemployment compensation
•    Local public assistance benefit
•    Veterans’ benefit
•    Disability or illness benefit
•    Alimony or spousal support
•    Payment from stock options, profit sharing plan, etc.

Declaring personal bankruptcy can be a good way to deal with overwhelming debt and relieve the stress that it places on yourself and your family; however, it is important to consult a qualified bankruptcy attorney prior to filing the petition to ensure that you fully understand the consequences that it will have on your future financial state.  In addition, if you are eligible to use federal bankruptcy exemptions, it is important to compare them to the ones of your state to see which would be most beneficial in your situation.

To find out more about the personal bankruptcy process and to see if filing a claim is right for you, please fill out our free bankruptcy evaluation.