Is Bankruptcy Federal Law or State Law?
When it comes to bankruptcy, both federal and state laws play important roles in shaping the process. Bankruptcy law is primarily governed by federal law, specifically the U.S. Bankruptcy Code, which outlines the legal framework for all bankruptcy cases in the United States.
However, state laws also come into play, particularly in the area of exemptions, which determine what property you can keep during bankruptcy. A Los Angeles bankruptcy lawyer can explain the interplay between federal and state law in bankruptcy, how exemptions work, and what that means for individuals filing for bankruptcy.
Federal Law and Bankruptcy: The U.S. Bankruptcy Code
Bankruptcy law is grounded in federal legislation, giving it uniformity across the country. The U.S. Constitution grants Congress the authority to establish “uniform Laws on the subject of Bankruptcies throughout the United States.” As a result, the U.S. Bankruptcy Code was enacted to provide a consistent legal structure for all bankruptcy cases, regardless of where the debtor lives.
The Bankruptcy Code outlines the different types of bankruptcy filings available to individuals and businesses, including:
- Chapter 7 Bankruptcy: Known as “liquidation bankruptcy,” Chapter 7 involves selling non-exempt assets to pay off creditors and discharging most remaining unsecured debts.
- Chapter 13 Bankruptcy: This is a “reorganization bankruptcy” where individuals with regular income can repay their debts over three to five years while keeping their property.
- Chapter 11 Bankruptcy: Primarily used by businesses, Chapter 11 allows for the reorganization of debts while the business continues to operate.
The rules and procedures for each type of bankruptcy are the same throughout the country because they are governed by federal law. Bankruptcy cases are handled in federal bankruptcy courts, not state courts, and federal judges oversee these cases. The U.S. Trustee Program, a division of the Department of Justice, is responsible for administering bankruptcy cases and ensuring compliance with the Bankruptcy Code.
The Role of State Law in Bankruptcy: Exemptions and Property Protection
While federal law sets the framework for bankruptcy, state law plays a significant role when it comes to exemptions—laws that determine what property a debtor can keep after filing for bankruptcy. Each state has its own exemption laws, and these exemptions vary widely.
When you file for bankruptcy, your property is categorized as either “exempt” or “non-exempt.” Exempt property is protected from liquidation, meaning you can keep it, while non-exempt property can be sold to pay off creditors in a Chapter 7 bankruptcy. In Chapter 13 bankruptcy, exemptions help determine how much you need to pay creditors under your repayment plan.
Federal vs. State Exemptions: What Are They?
The Bankruptcy Code provides a set of federal exemptions that individuals can use to protect their property. However, states are allowed to opt out of the federal exemption system and instead offer their own state-specific exemptions. In many cases, individuals have the choice between using federal or state exemptions, but in some states, only the state exemption system is available.
Common types of property covered by exemptions include:
- Homestead Exemption: Protects equity in your primary residence.
- Vehicle Exemption: Allows you to keep a vehicle up to a certain value.
- Personal Property Exemption: Covers household items, clothing, and other belongings.
- Retirement Accounts: Most retirement accounts, such as 401(k)s and IRAs, are protected under both federal and state law.
- Wages and Benefits: Certain income sources, such as wages, Social Security benefits, and disability benefits, may be protected.
For example, California offers two sets of state exemptions, and filers can choose the set that best protects their assets. States like Florida have generous homestead exemptions, which allow homeowners to protect a significant amount of equity in their homes.
How State Exemptions Affect Bankruptcy Filings
Choosing between federal and state exemptions (if both are available) can make a significant difference in the outcome of your bankruptcy case. The decision will depend on your assets and which exemption system better protects your property. For instance, if you own a home with substantial equity, the state homestead exemption may allow you to protect more of that equity compared to the federal exemption.
It’s important to note that exemption limits are subject to change. Both federal and state governments periodically adjust these limits to reflect inflation and other economic factors, so it’s important to work with a bankruptcy attorney to understand which exemptions apply at the time of your filing.
Which Law Applies to You?
Your bankruptcy case will be governed by both federal and state law. The overarching rules, including eligibility criteria, the bankruptcy process, and how debts are discharged, are dictated by federal law. However, your state’s exemption laws will determine how much property you can protect from creditors. Additionally, state laws may also influence which debts can be discharged. For example, certain tax debts or child support obligations may be affected by specific state regulations.
Because of the complexity of the relationship between federal and state law in bankruptcy, it’s important to consult with a Los Angeles bankruptcy attorney who understands both systems. This ensures that you maximize the protections available to you and can navigate the bankruptcy process effectively.
Contact Wadhwani & Shanfeld
Bankruptcy is primarily governed by federal law, which ensures a consistent legal framework across the United States. However, state law also plays a crucial role, particularly when it comes to exemptions that determine what property you can protect during bankruptcy. Understanding the interplay between federal and state law is key to successfully managing your bankruptcy case and protecting your assets.
If you’re considering filing for bankruptcy and want to understand how federal and state laws impact your case, contact Wadhwani & Shanfeld today. Our experienced bankruptcy attorneys can help you navigate the complex legal landscape and guide you toward the best solution for your financial situation.
Sources:
moneywiselaw.com/bankruptcy-local-practice/
findlaw.com/bankruptcy/bankruptcy-laws-by-state/california-bankruptcy-exemptions-and-law.htm
