Chapter 7 Bankruptcy: State vs. Federal Exemptions

Filing for Chapter 7 bankruptcy doesn’t necessarily mean that an individual must give up every piece of property they own. Both the New Jersey and Federal rules allow for a list of exempt property, which will remain in the debtor’s possession and “exempt” from sale or distribution to creditors throughout the bankruptcy proceeding. For a married couple filing jointly, these exemptions can be claimed by both parties on property they share an interest in, effectively doubling the exempted amount.

Choosing a Set of Exemptions

federal bankruptcy ExemptionWhile both New Jersey and the federal government allow for a specific set of property that is exempt from bankruptcy proceedings, the law does not allow an individual to pick and choose from either or both sets. At the time of filing, the debtor must determine whether they will use the New Jersey rules or the Federal rules. 

These two sets of exemptions vary in some important ways, and can make a major impact on the debtor’s finances once the proceedings are complete. It’s best to consult with an experienced bankruptcy attorney who can properly research an individual’s specific financial circumstances and determine which set of exemptions will be most advantageous. Here are a few important distinctions to consider when speaking with an attorney.

The Homestead Exemption

Perhaps the most important question involving a bankruptcy proceeding revolves around what is usually an individual’s largest asset: their home. Figuring out whether to file for Chapter 7 (or Chapter 13 or some other alternative) and choosing which set of exemptions to use may ultimately fall to whether or not an individual owns their home, and if so, how much equity they have in the property at the time of filing.

A person with a great deal of equity in their home (likely someone who has made many mortgage payments over a period of years) may not be best advised to file for Chapter 7 bankruptcy. If their home’s equity is substantial enough to cover other debts, the case trustee may decide that selling the home and distributing the proceeds is the most reasonable way to complete the bankruptcy process. Conversely, if there is a lot of equity in the home, but not necessarily enough to clear one’s other debts, it may make sense to consider filing for Chapter 13 rather than Chapter 7.

However, for those individuals with some equity in their home, but not a substantial amount, Chapter 7 might be the best route, provided that they opt for the Federal set of exemptions which includes a Homestead Exemption. 11 U.S.C. § 522(d)(1) of the Federal Rules provides that an individual may exempt equity in their primary residence in the amount of $25,150. 

So, for example, a person owning a home valued at $125,000, who still owes $100,000 on the mortgage would be well advised to opt for the federal exemption, which would allow them to keep almost all of the equity in their home throughout the bankruptcy proceeding. It should be noted that this person will need to be current on their mortgage payments and have sufficient future income to remain current. Under these circumstances they may be able to reaffirm their mortgage debt, maintain their equity and keep their home.

Automobile Exemption

Next to a home, a car is likely to be one of the more expensive assets owned by an individual filing for Chapter 7 bankruptcy in New Jersey. Once again, the federal rules differ from the state rules as to whether this property can be considered exempt from the bankruptcy proceeding. Under the Federal rules, an individual may exempt one motor vehicle interest valued at $4,000. Under the New Jersey rules there is no automobile exemption, however an individual may opt to use their personal property exemption (valued at $1,000) toward an automobile.

This exemption, and whether it makes sense to apply it, will fall along the same reasoning as whether one should apply the homestead exemption. For example, a person who has made $4,000 of payments toward an $80,000 car may not have the future income to continue these payments, prompting a case trustee to sell the car and distribute any equity amongst their creditors. However, if a person filing for bankruptcy currently owns one reasonably priced car that they will need in the future for work and other responsibilities, then opting for this exemption may make sense.

Retirement/Investment Income

One last major area where the state rules differ greatly from the federal rules on exemptions for bankruptcy is in retirement and investment income. Currently, the federal rules allow for the full exemption of all retirement accounts that are otherwise tax exempt, with IRAs and Roth IRAs being capped at $1,362,800. This considerably large exemption will be ideal for an individual that has spent years working in the private sector and contributing to a retirement account for their future. New Jersey also offers protection of some of these assets, but it is not as substantial.

How about people who spent their careers working for a public entity, like teachers and police officers, are their pensions at risk? The answer is yes, if they opt for the federal set of exemptions. The federal rules protect some, but not all pensions that fall into this category. Fortunately, the New Jersey rules specifically carve out an exemption for the pensions of public employees from a number of vocations including teachers, police officers, firefighters, municipal and county employees and others. 

Once again, understanding an individual’s specific assets, debts, and goals for the bankruptcy proceeding will play a vital role in determining which set of exemptions is best suited to their needs. Choosing incorrectly can have a severe financial impact for the filer, so it’s best to consult with an experienced attorney who can advise on the ideal strategy for their bankruptcy proceeding.

Other Differences

Many other differences exist between the two sets of exemptions, and their impact will vary depending on the individual circumstances of the person filing for Chapter 7 bankruptcy. The federal rules consider wages that have already been earned but as of yet are unpaid as part of the “bankruptcy estate,” meaning that they are eligible to be distributed amongst creditors once received. The New Jersey rules allow for an exemption of up to 90% of these unpaid wages, depending on the debtor’s income.

There are also many distinctions in how different rules apply to personal property. New Jersey exempts all personal clothing but caps exemptions on total other personal property at $1,000. The federal rules do not exempt all personal clothing outright, but instead allow a total personal property exemption of $13,400, which can include clothing items.

There are several more areas where the two sets of exemptions differ, from how partnership property is treated to the treatment of insurance benefits and beyond. The smartest way for a person thinking of filing for Chapter 7 to fully understand what of their property will survive a bankruptcy proceeding is to consult with a qualified attorney and develop a strategy that will work best for their individual circumstances. At Rosenblum Law our experienced attorneys are ready to assist you, call us today.

Can I keep my furniture if I file Chapter 7?

Yes, depending on its value. New Jersey allows for an exemption of $1000 for household goods and furniture. In addition both the New Jersey and Federal exemptions allow for a “wildcard” exemption of personal property that can be applied to furnishings.

Can I keep credit cards in Chapter 7?

Generally speaking, yes, though it might not be the best idea. If the card has a high balance on it the debtor would need to reaffirm this debt with the creditor in order to keep the card, meaning they would still owe this debt after the bankruptcy. If the debtor has a card with a low or zero balance at the time of filing, it may make more sense to reaffirm and keep the card.

Can I keep two cars in Chapter 7?

It’s possible, however you will need to use the right exemptions to protect the equity you have in the cars. If you’re still making payments on the cars you’ll need to show that you’re current on the payments and can continue making them in the future.

Can I keep cash when filing Chapter 7?

Yes, though the amount will depend on the exemption used to protect it, for example the New Jersey wildcard exemption allows for $1000 of personal property to be exempt from bankruptcy, and this can include cash. There are other exemptions for things like insurance policies and retirement accounts, and wages have their own set of rules. It’s best to consult with an attorney to determine which property will be exempt from the bankruptcy proceeding.

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