Where Will You Declare Bankruptcy?

Posted on: 10 September 2020

You might not realize it, but the state you use when declaring bankruptcy could have a major impact on how things go. While a chapter 7 bankruptcy filing is a federal issue, each state has some input into several important aspects of a filing. Read on and find out more about how to choose your state of residency for bankruptcy filing purposes.

Do You Have a Choice of States?

Before getting into how the state of residency matters to bankruptcy filers, it's important to understand how to determine your state of residency. Some background might be in order. Each state has different rules about exemptions and other things, making some states more attractive to filers. In the past, that meant "forum shopping" for filers, and it placed undue burdens on certain states. The bankruptcy codes underwent a major overhaul in 2005, resulting in the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). This act put in place certain residency rules to prevent filers using the state of their choice for filing purposes. The main thing to know about the new rules is that filers have to show residency in a state for two years before they can use it as their filing state. If you have been a resident for at least 180 days, however, speak to your bankruptcy lawyer about being able to file.

Why the State of Residency Matters

Exemptions matter a great deal in how much personal property and real estate a filer can keep after a chapter 7 filing. There are state exemptions and there are also federal exemptions. Some states use only state exemptions, and some allow filers to choose between state and federal. This can present a confusing scenario for filers who have a choice. A careful examination of the federal vs. state exemptions is vital to ensure that you don't unnecessarily lose property to seizure.

Also, each state that uses its own exemptions presents bankruptcy filers with a wide variety of exemptions. Some states are more generous than other states with what a filer can keep. For example, filers in California can deduct a whopping $75,000 in equity for their homestead (the primary residence). On the other hand, California doesn't allow filers to double their exemptions when they file jointly. Alabama allows filers to use only $15,000 in a homestead exemption but does allow filers to double their exemptions when filing jointly.

To find out more about where you should file your bankruptcy, talk to a bankruptcy attorney.