The federal exemptions are nudging up about 3%. But that only matters if you are allowed to use them, and are higher than your state ones.
States with Access to the Federal Exemptions
This blog post is not for everyone. It’s only for the residents of 19 states—Alaska, Arkansas, Connecticut, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin, and the District of Columbia. It’s also for anybody who’s moved within the last 2 years from any of these places.
What makes these residents special is that they have the option of using a set of federal property exemptions to protect their assets when filing bankruptcy (instead of their state exemptions). And those federal exemptions are nudging higher as of April 1, 2016.
What Makes These States So Special?
If bankruptcy is a matter of federal law under the U.S. Constitution, why can’t the residents of the rest of the states use the federal property exemptions? Why are they stuck with their state’s set of property exemptions, which in some cases are much lower than the federal exemptions?
The reason is that the residents of those other states are the victims of a compromise made in bankruptcy law between federal power and states’ rights. This compromise allows each state to dictate that their residents must use that state’s set of property exemptions when filing bankruptcy, and can’t use the federal ones. The 31 states not listed above have so dictated.
Does It Really Matter?
We said that state exemptions can be much lower than the federal ones. In situations where that’s true, it can hurt a lot not to be able to use the federal exemptions.
Take the homestead exemption (in Section 522(d)(1) of the Bankruptcy Code). The federal homestead exemption is $22,975 before April 1, 2016, and is $23,675 on and after that day. (It’s double those amount for a married couple jointly owning a home.)
If you individually owe a home worth $200,000 with a mortgage of $180,000, your equity of $20,000 would be fully protected by the federal homestead exemption. That’s because the $22,975/$23,675 exemption amount is larger than and covers the entire amount of the $20,000 equity. But that would only work this way if you live in one of the above 19 states in which debtors are able to use the federal exemptions.
Take the state of Kentucky. The state homestead exemption is much lower than the federal one. It’s only $5,000 for an individual (double that for a couple). That would be way too low to protect $20,000 in home equity.
But because Kentucky allows its residents to use EITHER the state OR federal sets of exemptions, you could choose the federal exemptions and fully protect the $20,000 in equity.
However, if you were instead a resident of the state next door to the east, Virginia, the situation would be completely different. Virginia also has a $5,000 homestead exemption (double that for a couple). But it has chosen NOT to allow its residents to use the federal set of exemptions. So the higher federal homestead exemption is not available.
When It Doesn’t Matter
There are quite a few states which, like Virginia, do not allow the use of the federal exemptions but have higher state exemption amounts, at least in the particular exemptions that count in a particular situation.
Utah, for example, requires its residents to use its state exemptions, and not the federal ones. But its homestead exemption is $30,000 (double that for a married couple). So $20,000 in home equity would be fully covered.
West Virginia, with $25,000 for an individual’s homestead exemption, and Colorado, with $60,000, also require use of its state exemptions. But their homestead exemptions are higher than the federal one so in that respect it doesn’t hurt.
Can’t Pick and Choose Among Different Federal and State Exemptions
We’ve just been focusing here on the homestead exemption, and comparing the federal and state amounts. But you may not even own a home and of course you own other things other than a home. So there are within the state and federal exemptions different exemptions to cover different types of assets. To illustrate, here’s a list of many of the federal exemptions (with their before-April 1, 2016 amounts and their starting-April 1 amounts):
homestead, increasing from $22,975 to $23,675
motor vehicle, from $3,675 to $3,775
household goods and clothing, from $575 to $600 “in any particular item,” from $12,250 to $12,625 “in aggregate value”
jewelry, from $1,550 to $1,600
“any property,” from $1,225 to $1,250, plus from $11,500 to $11,850 to the extent of any unused homestead exemption
tools of trade, from $2,300 to $2,375
personal bodily injury claim, from $22,975 to $23,675
If you are filing bankruptcy in a state where you have a choice between that state’s exemptions and this federal set, you have to look at all your assets and see which set of exemptions covers all your assets better.