Bankruptcy Exemptions

For many people struggling with debt, bankruptcy offers the opportunity to escape mounting bills and wipe the slate clean. In fact, bankruptcy laws are intended to grant debtors who are having trouble paying their creditors a financial “fresh start.” These laws also help you keep certain types of property when you file for bankruptcy. If you live in New York, state and federal exemptions protect some of your property and assets throughout the bankruptcy process.

Bankruptcy courts use exemptions to decide which portions of your property should be shielded from bankruptcy. If you choose to file for chapter 7 bankruptcy, these exemptions protect certain assets from liquidation. If you opt for chapter 13 bankruptcy, on the other hand, the court employs exemption rules to determine your repayment plan. Both federal and New York bankruptcy laws outline the types and amounts of property you can protect during bankruptcy.

Since bankruptcy is under the jurisdiction of U.S. bankruptcy courts, the federal government maintains a schedule of exemptions. But individual states are allowed to develop their own sets of exemption standards—and even opt out of the federal schedule. Some states, including New Jersey and Connecticut, allow individuals who file for bankruptcy to use either the state or federal exemption schedule, whereas others (Delaware and Maine, for example) require filers to follow the state system. As of 2010, if you file for bankruptcy in New York, you may decide which exemption system will provide you the most benefits.

Your house, condo, apartment or other residence is probably one of your most significant assets, and one that’s especially important to protect. In most states, bankruptcy courts grant protection to at least a portion of a home’s equity based on federal or state exemptions. At the federal level, up to $22,975 of home equity is shielded by the homestead exemption. State homestead exemption allowances differ widely; some states place no cap on the exempted amount, while others, such as New Jersey, don’t have a specific homestead exemption. In New York, the amount of equity you can safeguard during the bankruptcy process depends on your county of residence: $150,000 of equity is protected in Bronx, Kings, New York, Queens and Richmond counties, while certain other areas of the state allow $75,000 or $150,000.

If you’re considering bankruptcy, you might also wonder whether your income and earnings are protected by exemptions. Federal law safeguards most retirement accounts during bankruptcy, and most states offer further exemptions. Many public benefits, like Social Security and unemployment payments, are protected in New York, New Jersey and Connecticut, for example. Some states also provide exemptions for regular wages, albeit to varying degrees: New York bankruptcy laws protect a portion of the income you make before filing for bankruptcy, while states like Connecticut include provisions that apply to current income levels.

Bankruptcy exemptions shield other types of property and assets as well, including clothing, furniture, food and books. Your vehicle’s equity, for instance, is covered up to $3,675 if you opt for the federal exemption schedule. Under state laws, the exempted equity amounts for vehicles range from no specific coverage (in New Jersey) to amounts several times that of the federal level (Connecticut allows up to $13,500). New York falls in the middle of that range: in most cases, if you elect state exemptions, you can protect up to $4,000 in equity in a single car.

If you decide to file for bankruptcy in New York, it may be difficult to determine which system will provide better protection. Comparing long lists of exempted property types and amounts can be overwhelming, and standards change periodically. Furthermore, you may also be eligible for certain added benefits (New York and federal exemptions can be doubled for some married couples, and many veterans and civil employees are covered by additional federal nonbankruptcy exemptions, for instance). To protect as many of your assets as possible, even if you’re not required to appear in bankruptcy court, it’s important to consult an attorney who can help you select the best exemption system and guide you through the bankruptcy process.