State v. Federal Bankruptcy Exemptions

Learn when you must use your state exemptions and when you have a choice between state and federal exemptions.

Congress created federal exemptions so that bankruptcy filers could keep a certain amount of their property and make a fresh start after bankruptcy. There is a set of exemptions set by federal bankruptcy law and each state also has a set of exemptions that may be used in bankruptcy. (To learn how exemptions work and the role they play in both Chapter 7 and Chapter 13 bankruptcy, see the articles in Bankruptcy Exemptions.)

Read on to learn when you must use your state exemptions when you have a choice between state and federal exemptions, and if you do have a choice, what to consider when deciding which system to use.

Federal vs. State: When Can You Choose?

When Congress created the federal exemptions, it also gave permission to the states to create their own exemption systems and opt out of (choose not to use) the federal exemption system.  Since then, every state has created its own set of exemptions and many (but not all) have opted out of the federal system entirely.  This means that depending on where you live, your state may require you to use its set of exemptions or it may allow you to choose between state and federal exemptions. 

Even if you live in a state that allows you to choose, you must pick either the federal bankruptcy exemptions or the exemption system of your state (you cannot mix the two exemption systems). 

States That Offer a Choice

If you live in one of the following states then you have the option of choosing between the state and federal exemption systems:  Alaska, Arkansas, Connecticut, District of Columbia, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin.  If you don’t live in one of these states, then you must use the exemption system of your state.

Important Federal Bankruptcy Exemptions

Below are some of the most important federal exemptions that are relevant to almost all bankruptcy filers.  Keep in mind that the exemption amounts are updated every three years and were last adjusted in 2016.  Also, if you are a married couple filing a joint bankruptcy, then you are allowed to double all federal exemption amounts (so you would be allowed twice the amounts listed below). You can find a full list of the federal bankruptcy exemptions at Nolo.com.

Homestead Exemption

The federal homestead exemption protects the equity you have in your house.  Currently, the federal homestead exemption is set at $23,675. To learn more about how this exemption works, see The Homestead Exemption.

Personal Property Exemptions

Personal property is any property you own other than real estate. The most regularly used personal property exemptions allowed under the federal system are $3,775 for a motor vehicle, $1,600 for jewelry, and $12,625 in aggregate ($600 for each individual item) for items such as household goods and furnishings, appliances, and clothing.

Wildcard Exemption

The federal system has a wildcard exemption of $1,250 which you can use for any type of property.  Also, if you have not used your entire homestead exemption, then $11,850 of any unused portion can be used as a wildcard as well. To learn more, see Wildcard Exemptions in Chapter 7 Bankruptcy.

Retirement Accounts

With a few exceptions, all money you have in retirement accounts is exempt under the federal system as well as the state systems because states are not able to opt out of these exemptions. There is a cap of $1,283,024 on IRAs and Roth IRAs.

How Do State Exemptions Differ From Federal Exemptions?

Since each state has a different exemption scheme, you must look to your individual state’s exemption laws to determine how they are different from the federal system.  For example, some states allow much greater, even unlimited, homestead exemptions while others offer less than the federal amounts.

California does not allow you to use the federal exemptions but it has two different sets of state exemptions you can choose from.  One set is similar to the federal system and allows a generous wildcard exemption while the other is designed to exempt a much greater amount of home equity. 

Should I Choose State or Federal Exemptions?

This question first depends on if you live in a state that offers a choice between the two.  If you do, then the answer will depend on your specific circumstances.  For example, if you have a lot of equity in your house and you live in a state with an unlimited homestead exemption then you would likely pick the state exemption over federal exemptions.

The Federal Nonbankruptcy Exemptions

These exemptions are called nonbankruptcy exemptions because they exist under laws other than bankruptcy.  These are specialized exemptions usually concerning people such as civil, military, or foreign service employees, social security recipients, and veterans.  You may use these exemptions if you are using a state exemption system (that is, you may use them in addition to your state's exemptions) but they are not available to you if you are using the federal bankruptcy exemptions.

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