Which Should I Use: The New York or Federal Bankruptcy Exemptions?

Find out whether it's better to use the New York bankruptcy exemptions or the federal bankruptcy exemptions in your situation.

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If you live in New York and plan to file for Chapter 7 bankruptcy, you must decide whether you will use the New York exemptions or federal bankruptcy exemptions. Because bankruptcy exemptions allow you to keep certain property in bankruptcy, whether you should use the New York or federal exemptions will depend on what property you want to keep. Here’s a primer on which you should choose.

What Are Bankruptcy Exemptions?

In Chapter 7 bankruptcy you can discharge (get rid of) most of your debt. In exchange for a discharge of your debt, you must give up some property to the bankruptcy trustee. The trustee will use this money to repay your creditors, in part. But to help you get back on your feet and give you a fresh financial start, you are allowed to keep most essential items of property and many non-essential items of property. In many circumstances, you can keep all of your property.

Each state and Congress has set forth a list of the property that bankruptcy filers can keep in Chapter 7 bankruptcy. These are called exemptions. If an item of property is exempt, you don’t have to turn it over to the bankruptcy trustee. By strategically using exemptions, you keep as much of your property as possible. (For exemption planning and strategy tips, see Maximize Your Bankruptcy Exemptions.)

The exemptions that are available to you depend on which state you live in. In some states, you must use your state’s exemptions. In other states, you must choose between your state’s exemptions and the federal bankruptcy exemptions. New York is one of the states that allow you to choose between the state and federal exemptions. You cannot mix New York exemptions with federal exemptions; you must use all New York or all federal exemptions.

Comparing New York and Federal Bankruptcy Exemptions

When deciding which set of exemptions will help you most, start by comparing the most commonly used New York exemptions with the most commonly used federal bankruptcy exemptions.

The Most Commonly Used Exemptions

Most debtors care about keeping their home, car, life insurance, personal property, and retirement accounts. Here’s a summary of how the New York and federal exemptions treat each of these types of property.

 

New York(1)

Federal(1)

Homestead

$150,000(2) or $125,000(3) or $75,000(4)

$22,975

Car

$4,000

$3,675

Life Insurance

Death benefit fully exempted

Cash value fully exempted(5)

Death benefit fully exempted

Cash value $12,250

Personal Property

$10,000

$12,250

Wildcard(6)

$1,000 (if no homestead claimed)

$1,225 (+ $11,500 of unused homestead)

Retirement

$1,245,475 for IRAs

Most other benefits fully exempted

$1,245,475 for IRAs

Most other benefits fully exempted

(1) All values are doubled when a husband and wife file jointly

(2) Kings, Queens, NY, Bronx, Richmond, Nassau, Suffolk, Rockland, Putnam, Westchester counties

(3) Dutchess, Albany, Columbia, Orange, Saratgo, Ulster counties

(4) All other counties

(5) Fully exempted when debtor is owner of policy on spouse’s life

(6) You can use the wildcard exemption for any item of personal property or to increase another exemption. 

Bankruptcy Exemptions in New York: The Big Picture

Looking at the big picture, the New York scheme provides more generous homestead and life insurance exemptions, while the federal scheme provides a more generous wildcard exemption. Both schemes permit you to keep essentially all of the funds in your retirement accounts.

In many cases this big picture is all you need to decide which scheme is best for you. But in some cases you might have to consider the numerous other New York and federal exemptions. For a detailed list of the exemptions under each scheme, see New York Bankruptcy Exemptions and Federal Bankruptcy Exemptions.

When Are the New York Exemptions Better?

You will probably want to use the New York exemptions in the below situations.

You Have a Lot of Home Equity

The New York and federal exemption schemes each have a homestead exemption that permits you to protect equity in your home. Using the federal exemptions, you can protect only $22,975 in home equity. But using New York exemptions, depending on which county you live in, you can protect between $75,000 and $150,000 in home equity. So if you have lots of home equity, you may be better off using the New York exemptions.

You Have a Valuable Life Insurance Policy

The New York and federal exemption schemes also each have a life insurance exemption that permits you to protect death benefits and cash value. The death benefit exemption is the same under each scheme. However, the cash value exemption is not the same. Under the federal exemptions, you can protect only $12,250 of the cash value in your life insurance. But using the New York exemptions, you can protect all of the cash value in your life insurance. So if your life insurance policy has lots of cash value, you should probably choose the New York exemptions.

When Are the Federal Exemptions Better?

If you don’t own a home, or you don’t have any home equity, you will probably want to use the federal bankruptcy exemptions in the below situations.

You Want to Keep Property That Does Not Have a Specific Exemption

For some items, there is no exemption under either the New York scheme or the federal scheme. A wildcard will help in this situation because you can use a wildcard to protect any property for which there is no exemption. (To learn more about how wildcard exemptions work, see Wild Card Exemptions in Chapter 7 Bankruptcy.)

For example, there is no New York or federal exemption for a stamp collection. But you can protect a stamp collection, up to a certain dollar amount, by using a wildcard. You can use the wildcard in this manner to exempt a rare bottle of wine, an airplane, a second car, or any personal property for which there is otherwise no exemption.

Because the federal wildcard is more generous than the New York wildcard, the federal exemptions are better for you when you have valuable property for which there is no exemption. (The New York wildcard is $1,000; the federal wildcard is $1,225 plus any unused homestead exemption up to $11,500.) So if you have a $12,775 stamp collection, and you have no home equity that you need to protect, you should probably choose the federal exemptions.

The Value of an Item of Property Is Higher Than the Exemption Amount

If you want to keep a particular piece of property and the New York or federal exemption for that property is lower than the equity you have in the property, you can use a wildcard exemption to protect the additional value.

You can use the wildcard in this manner to increase any exemption. Because the federal wildcard is more generous than the New York wildcard, the federal exemptions are better for you when you have valuable property that you cannot fully protect with an existing exemption.

When the Choice Is Unclear

Unfortunately, it’s not always clear which set of bankruptcy exemptions you should use. For example, you may want to keep a particular item of property that only the New York exemptions will protect, and another item that is only protected by the federal bankruptcy exemptions.

This dilemma most often arises when you own a home with substantial equity (in which case the New York homestead exemption would be better), but also have personal property for which there is no exemption (in which case, the more generous federal wildcard exemption would be beneficial). Because you cannot mix New York exemptions with federal exemptions, in this situation, you will have to choose which property to protect. If the value of your home equity and that of your personal property is roughly equal, the choice can be difficult.

If the personal property you want to keep is of modest value, you may be able to keep it using other methods. (See Keeping Nonexempt Property in Chapter 7 Bankruptcy.) Consult with a local bankruptcy attorney to learn about the full range of your options.

by: Tony Thompson

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