Is Chapter 7 bankruptcy different from state to state?
Chapter 7 bankruptcy is a federal proceeding, meaning it’s governed by federal laws and requires debtors to file through a federal court. However, that does not mean it doesn’t vary from state to state.
Aspects of the process, such as exemption laws and filing requirements, may vary depending on the individual’s location.
A brief overview of Chapter 7 bankruptcy
Chapter 7 bankruptcy, also called liquidation bankruptcy, involves a court-appointed trustee selling off non-exempt assets to pay creditors. This allows a debtor to discharge most of their unsecured debts. While filing for bankruptcy is a hard decision to make, it may benefit those individuals who cannot pay back their debts and are struggling financially.
Filing for Chapter 7 provides an opportunity for a fresh start, free from credit card balances, medical bills, or personal loans. However, not all debts are dischargeable, such as student loans, child support, or certain tax obligations.
Example of state bankruptcy laws
To understand how bankruptcy laws mary vary from state to state, let’s take a look at Pennsylvania. This state follows federal bankruptcy law, meaning filers have to file through a United States Bankruptcy Court. There are several throughout the state catering to each district. But, beyond federal law, Pennsylvania also has its own requirements specific for this state.
Exemptions for assets
One of the biggest differences from state to state when it comes to Chapter 7 bankruptcy is the way each state governs exemption laws. This determines what a debtor can keep when filing Chapter 7 bankruptcy.
Exempt assets cannot be sold off to discharge debt and are protected from bankruptcy filings. Federal bankruptcy laws dictate their own set of exemptions. But, filers in Pennsylvania can choose either federal bankruptcy exemptions or Pennsylvania state-specific exemptions, giving them two options.
Under Pennsylvania state exemptions, personal property, wages, retirement accounts, and life insurance are protected. However, unlike other states, Pennsylvania does not offer a homestead exemption, which would protect a portion of a debtor’s home equity.
Under federal exemptions, Chapter 7 filers are offered broader protections. For one, federal exemptions do include a homestead exemption of $27,900 and a wildcard exemption to be applied to various assets.
If you are unsure of which option to choose when filing in Pennsylvania, it’s best to consult with a bankruptcy attorney to determine the right course of action.
Median income for means testing
To qualify for Chapter 7 bankruptcy, debtors must pass the means test, which compares their income to the median income of their state. The income threshold varies depending on the state and household size. Using the same example state of Pennsylvania, the median income fluctuates and is updated periodically, meaning a debtor who qualifies one year may not qualify the next.
Filing fees and local court procedures
Another difference by state when filing for bankruptcy is the cost of fees to file, as well as court procedures. Although bankruptcy requires filing through a federal court, procedures could change based on that court’s locale.
Pennsylvania offers multiple federal bankruptcy courts that handle cases based on where debtors live. Each district must go to a certain federal bankruptcy court in the state. The fees to file for that district are on their own website. For example, if filing in Reading, PA, debtors must use the United States Bankruptcy Court Eastern District of Pennsylvania.
Why it’s important to understand state-specific differences
Filing for Chapter 7 bankruptcy requires careful planning, and understanding Pennsylvania’s unique laws can help debtors maximize their exemptions and protect their assets. Since choosing between federal and state exemptions can significantly impact what property is retained, it is highly recommended that individuals consult with an experienced bankruptcy attorney before filing.
