Exemptions Under Chapter 7 and 13: How Do They Work

Exemptions can be complicated. There are federal exemptions provided in 11 U.S.C. § 522(d), but each state has the right to opt out of the federal exemption and provide their own to their state residents, or to provide their residents with a choice between using the federal exemptions or the state’s exemptions. Although bankruptcy laws are supposed to be uniform across all 50 states, there is no real uniformity in exemptions from state to state.

To put it simply, an exemption is claimed against equity in property. To see how different exemptions can be, and to see the real-life impact of those exemptions, let’s use the following example:

$225,000.00 = value of a home

$125,000.00 = amount of the mortgage secured by the value of this home

$100,000.00 = equity.

Without any exemption, in a Chapter 7 case, the Chapter 7 Trustee would sell the home and distribute 100,000.00 to an individual’s creditors, which explains why Chapter 7 is considered a "liquidation bankruptcy".

On the other hand, in a Chapter 13 case, the individual would have to pay at least $100,000.00 to creditors over a period of up to 5 years if the individual wanted to keep the property.

It comes without saying that exemptions play a significant role in both Chapter 7 and Chapter 13 bankruptcy because they are used as a shield to protect your property from creditors.

BANKRUPTCY EXEMPTIONS BY STATE

Now let’s look at the exemptions available in Ohio, West Virginia and Pennsylvania.

(N.B. exemption amount change periodically and the amount used in this article are current as of the date of it publication.)

In Ohio, an individual can claim a homestead exemption of up to $161,375.00. If our individual in this example filed a Chapter 7 bankruptcy proceeding in Ohio, no amount of the equity would be payable to the individual’s creditors.

In West Virginia, an individual may claim up to $35,800.00 as exempt. If the house is jointly owned, the exemption may be $71,600.00. In West Virginia, to keep the home, Chapter 13 may be the best option; however, if the property is jointly owned there are creative options to manipulate the hypothetical distribution of proceeds to make Chapter 7 an option, or to make Chapter 13 a more affordable option.

In Pennsylvania, individuals are permitted to use the federal exemptions, which are more generous than those provided by the State. The federal homestead exemption is currently $27,900. If our individual lived in Pennsylvania, Chapter 13 is most likely the individual’s best option if the individual wants to keep his or her home.

Based on the above differences, it is tempting to conclude that residents of West Virginia and Pennsylvania should move to Ohio before filing bankruptcy. Some states, like Florida, even allow an unlimited homestead exemption. Before attempting to do so, be aware that Congress requires that an individual be a resident of a particular state for at least 730 days before claiming that State’s available exemptions. For periplectic individuals who have lived in more than one state, the determination is even more complex, and exemptions are controlled by the state of residence in the 180-day period immediately before the 730-day period (where did you live 731-910 days ago?).

Exemption planning can be very complex. Qualified bankruptcy counsel is essential to help you navigate the process, to protect your valuable assets, and to restore your financial stability. If you are a resident of Ohio, West Virginia or Pennsylvania, are in financial distress, and are contemplating bankruptcy as an option, contact us to schedule a complimentary 30-minute consultation.