How does bankruptcy stop garnishments, foreclosures, and repossessions?


Filing a bankruptcy case gets immediate protection for you, for your paycheck, for your home, and for all your possessions. This “automatic stay” provides this kind of protection for you and your property the moment either a Chapter 7 “straight bankruptcy” case or a Chapter 13 “adjustment of debts” case is filed. Virtually all efforts by all your creditors against you or anything you own comes to an immediate stop.

“Automatic Stay” = Immediate Stop

“Stay” is simply a legal word meaning “stop” or “freeze.”

“Automatic” means that this “stay” goes into effect immediately upon the filing of your bankruptcy petition. That filing itself, according to the federal Bankruptcy Code, “operates as a stay” of virtually all creditors’ actions to pursue a debt or take possession of collateral. Since the filing of your case itself imposes the stay, there is no delay or doubt about whether a judge will sign an order to impose the “stay” against your creditors.

Creditors Need to Be Informed, Sometimes Directly

Although the protection of the “automatic stay” is imposed instantaneous, practically speaking your creditors need to be informed about the filing of your case so that they are made aware that they must comply with it. If your creditors are all listed in your bankruptcy case documents, they should all get informed by the bankruptcy court within about a week or so after your case is filed. This doesn’t take any additional action by either you or your attorney (beyond making sure all of your creditors are listed in the schedule of creditors filed at the bankruptcy court). If you have no reason to expect any action against you by any of your creditors before that, just letting them all be informed by the court is usually all that’s needed.

However, if you are expecting some action by any of your creditors quicker than a week or so after filing the case, be sure to talk with your attorney about it. That way any such creditor can be directly informed by about your bankruptcy filing to stop whatever collection action it was contemplating. Make sure you and your attorney are clear which of you is informing that creditor and in what way.

Creditor Action Taken Unexpectedly

But what if a creditor has not yet been informed of your bankruptcy filing when it takes some action against you or your property in the days after your bankruptcy filing but before it finds out about it?

If this happens, the “automatic stay” is so powerful that in most circumstances such a creditor must undo whatever action it took against you after your bankruptcy was filed, even if this creditor honestly did not yet know about your filing. For example, if after your bankruptcy is filed a creditor files a lawsuit against you or gets a judgment on a lawsuit that it had filed earlier, the creditor must dismiss (throw out) its lawsuit or vacate (erase) the judgment.


What makes it illegal for your creditor to pursue a discharged debt? What penalties may get awarded to you if a creditor breaks the law?


Chasing a Discharged Debt is a Violation of Federal Law

The Bankruptcy Code makes it perfectly clear that for a creditor to try to collect on a debt after it is discharged under either Chapter 7 “straight bankruptcy” or Chapter 13 “adjustment of debts” is illegal. Section 524 of the Bankruptcy Code is about the legal effect of a discharge of debt. Subsection (a)(2) of that section says that a discharge of debts in a bankruptcy “operates as an injunction against” any acts to collect debts included in that bankruptcy case. Acts explicitly stated as illegal include:

the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor.

In other words, the creditor can’t start or continue a lawsuit or any legal procedure against you, and can’t act in any other way to collect the debt.

What If a Creditor Violates This Injunction?

Nowhere in Section 524 of the Code does it say anything about what happens if a creditor violates the law by disregarding that injunction. The section does not clearly say what, if anything, the penalties are for a creditor caught doing so.

However, even though no penalties are specified in THAT section, there is a strong consensus among courts all over the country that bankruptcy courts can penalize creditors for violating the discharge injunction through another section of the Bankruptcy Code, Section 105, titled “Power of Court.” The idea is that the injunction against pursuing a discharged debt is a court order, and so a creditor violating it is in contempt of court. So the usual penalties for those who act in civil contempt of court apply.

Penalties Assessed Against Violating Creditors

These penalties for civil contempt can include “compensatory” damages and “punitive” damages.

Compensatory damages are intended to compensate you for harm you suffered because of the creditor’s violation of the injunction. These potentially include actual damages such as time lost from work or other financial losses, emotional distress caused by the illegal action against you, and attorney fees and costs you’ve incurred as a result.

Punitive damages are to punish the creditor for its illegal behavior. So the judge looks at how bad the creditor’s behavior was in determining whether punitive damages are appropriate and how much to award.


The vast majority of the time creditors in a bankruptcy case write the debts off their books and you never hear about those debts again. But even though it’s illegal for creditors to try to collect on a debt that’s been legally written off in bankruptcy, once in a while they do try. Some creditors don’t keep good records or simply aren’t all that serious about following the law.

So after you receive your bankruptcy discharge, if you hear from one of your old creditors trying to collect its debt contact your attorney right away.  This needs immediate attention. If the creditor’s behavior is particularly egregious, you and your attorney should discuss whether to strike back at the creditor for violating the law. There might possibly even be some money in it for you.


Can you really keep everything you own if you file bankruptcy?


The Answer: Usually Yes.

1) Yes, usually you can keep those possessions that you own free and clear—meaning you don’t owe any money to a creditor which has a lien on those possessions. 

2) Yes, usually you can keep those possessions which you don’t own free and clear—meaning you owe money to a creditor which has a lien on them—IF you want to keep them, AND are willing and able to meet certain conditions.

In today’s blog post we’ll address the first part of the above answer. We’ll get to the second part in the near future.

Keep What You Own Because of Property Exemptions, and Possibly Because of Chapter 13

Most people who file bankruptcy can keep what they own for two reasons: 1) property exemptions and 2) Chapter 13 protections. In a nutshell, property exemptions designate what types and amounts of assets you can keep; if you have any type or amount of property that isn’t covered, Chapter 13 adds an additional layer of protection.

The Core Principle of Chapter 7 Bankruptcy

In a Chapter 7 “straight bankruptcy,” your debts are discharged—legally written off forever—in return for you giving your unprotected assets to your creditors (as represented by the bankruptcy trustee). BUT, for most people, all or most of their assets ARE protected, or “exempt.”

As a result, debtors in Chapter 7 generally get a discharge of their debts without having to give any of their assets, or only a select set of assets, to the trustee.

Property Exemptions Aren’t As Simple As May Seem

  • The Bankruptcy Code has a set of federal exemptions, and each state also has its own exemptions. In some states you have a choice between using the federal exemptions or the state ones, while in other states you are only permitted to use the state exemptions. When you have a choice, choosing which of the two exemption schemes is better for you is often not clear and you need an experienced attorney to help with this.
  • If you have moved relatively recently from another state, you may have to use the exemption rules of your prior state. Because different state’s exemption types and amounts can differ widely, thousands of dollars can be at stake depending on when your bankruptcy case is filed.
  • Even once you know which set of exemptions apply to you, whether all of your assets are covered by an exemption and protected is often not clear. The exemption statues in many instances were written long ago using outdated language, often interpreted by the courts as to their current meaning. Plus the local trustees often have unwritten rules about how they interpret the exemption categories in practice. As a result, determining whether an asset is exempt or not involves much more than merely comparing a list of your assets against a list of the applicable exemptions.

So navigating through exemptions can be much more complicated than it looks, and is one of the most important services provided by your bankruptcy attorney.

If You Do Own Non-Exempt Assets

Most people who file a Chapter 7 bankruptcy case lose nothing to the trustee because everything they own is exempt.  But what if you DO own one or more assets which do not fit any of the available exemptions? If you want to keep those assets, they can often be protected through a Chapter 13 case.  We’ll cover that in our next blog post.


More income taxes and credit card debts can be discharged (written off) by tactically delaying bankruptcy. See an attorney to do this right.


Last week we introduced the idea that many of the laws about bankruptcy are time-sensitive. When your case is filed can have significant consequences. Last week we focused on the how timing can affect whether you can file a Chapter 7 case or are forced to do a Chapter 13 one. Today we address how timing of a bankruptcy filing can effect what debts can be discharged.

1. Most Income Taxes Can Be Discharged, with the Right Timing

Federal and state income taxes are forever discharged if you meet a number of conditions. Two of the most important of these conditions are met by just waiting long enough before filing your bankruptcy case:

  • Three years must have passed since the time that the tax return for that tax was due (plus any extension if you asked for one).
  • Two years must have passed since you actually filed the pertinent tax return.

For example, assume a taxpayer owes $10,000 to the IRS for the 2009 tax year. She had asked for an extension to file that year to October 15, 2010, but then did not actually file that tax return until October 31, 2011. The above 3-year condition is met after October 15, 2013, because that is three years after the tax return was due. But the 2-year condition has to be met as well, which would not occur until after October 31, 2013, two years after the actual tax return filing date. So filing a bankruptcy case on or before October 31, 2013 would leave that $10,000 tax debt still owing; filing on November 1, 2013 or after would result in it being discharged forever. Simply waiting this one day makes a difference of $10,000.

2. Recent Credit Card Purchases and Cash Advances More Easily Challenged

If a person incurs a debt without intending to repay it, that creditor can challenge the person’s ability to discharge that debt. It’s considered fraudulent—incurred with the intent to cheat the creditor.

Along the same lines, a debt that was entered into a very short time before the person files bankruptcy understandably leads the creditor to wonder if the person already intended to file bankruptcy at the time of that debt. The law takes this situation and creates a “presumption”: under very specific facts, recent credit card purchases and cash advances are “presumed” to be fraudulent. This presumption does not necessarily mean that that particular portion of the debt is not discharged, but that the creditor has a much easier time making that happen.

Here are the specific facts creating the presumptions. The law says that purchases on a single credit card totaling more than $650 made within 90 days before filing bankruptcy are “presumed” not to be dischargeable. Same thing with cash advances on a single account totaling more than $925 made within 70 days before filing bankruptcy.

As shown in our discussion about income taxes above, a delay in filing the bankruptcy case can also work to your advantage with these presumptions. We can avoid giving a creditor the benefit of these presumptions two ways. First, if possible do not use any credit or make any cash advances in the few months before filing bankruptcy—or certainly no more than the stated threshold dollar amounts on any single credit card. Or second, if you’ve already made such purchases and/or cash advances, we could simply hold off filing bankruptcy until the indicated 70-day and 90-day presumption periods have passed.

Be aware that while doing these would solve the presumption problem, a creditor could still challenge the debt’s discharge. But it needs to have evidence that you incurred a debt which you did not intend to pay, or that there was some other kind of fraud or misrepresentation. But because proving such bad intentions is difficult, such challenges without the benefit of a presumption are relatively rare.

So as long as you avoid filing bankruptcy within the 70/90 day presumption periods, you will significantly reduce the chance that the creditor will challenge the discharge of its debt.

Don’t get rushed into filing bankruptcy when the timing’s not right. Filing at the right time could save you thousands of dollars.


Timing Does Not Always Matter Much, But It CAN Be Huge

Many laws about bankruptcy are time-sensitive. And those time-sensitive laws involve the most important issues—what debts can be discharged (written off), what assets you can keep, how much you pay to certain creditors, and even whether you file a Chapter 7 case or a Chapter 13 one.

It is possible that the timing of your bankruptcy filing does not matter in your particular circumstances. But given how many of the laws are affected by timing, that’s not very likely. It’s wiser to give yourself some flexibility about when your case will be filed. If you wait until you’ve lost that flexibility—because you have to stop a creditor’s garnishment or foreclosure—you could lose out on some significant advantages.

Today’s blog post covers the first one of those potential timing advantages.

Being Able to Choose between Chapter 7 and Chapter 13

Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” are two very different methods of solving your debt problems. There are dozens and dozens of differences. You want to be able to choose between them based on what’s best for you, not because of some chance timing event.

To be able to file a Chapter 7 requires you to pass the “means test.” This test largely turns on your income. If you have too much income—more than the published median income for your family size and state—you can be disqualified from doing the get-a-fresh-start-in-four-months Chapter 7 option and be forced instead into the pay-all-you-can-afford-for-three-to-five-years Chapter 13 one.

The “Means Test” Income Calculation

What’s critical here is that income for purposes of the means test has a very special, timing-based definition. It is money that you received from virtually all sources—not just from employment or operating a business—during the six full calendar months before your case is filed, and then doubling it to come up with an annual income amount. For example, if your bankruptcy case is filed on September 30 of this year, what is considered income for this purpose is money from all sources you received precisely from March 1 through August 31 of this year. Note that if you waited to file just one day later, on October 1, then the period of pertinent income shifts a month later to April 1 through September 30.

So if you received an unusual chunk of money on March 15, that would be counted in the means test calculations if you filed anytime in September, but not if you filed anytime in October. If that chunk of money pushed you over your applicable median income amount, you may be forced to file a Chapter 13 case if your bankruptcy case is filed in September. But not if you filed in October because that particular chunk of money arrived in the month before the 6-month income period applicable if you waited to file until October.


Being able to delay filing your bankruptcy in this situation—here literally by one day from September 30 to October 1—allows you to pass the means test and therefore very likely not be forced to file a Chapter 13 case. Being in a Chapter 13 case when it doesn’t benefit you otherwise would cost you many thousands of dollars in “plan” payments made over the course of the required three to five years. Clearly, filing your case at the tactically most opportune time can be critical.

The sooner you meet with a competent attorney who can figure out these and similar kinds of considerations, the sooner you will become aware of them and the more likely problems like the one outlined here can be avoided. 

Acting honorably towards a favorite creditor or two before filing bankruptcy can make you anything but their favorite.


Paying Your Favorite Creditor Before Filing Bankruptcy

Although bankruptcy law fixates on what you own and who you owe at the moment your bankruptcy case is filed, there are some important ways that the law can look into the past. “Preferences” are an example where the bankruptcy system can potentially look into and upset a certain limited piece of your past.

If during the 365 days before you file a bankruptcy you pay a creditor more than you are paying at that time to your other creditors, then after you file bankruptcy that favored creditor could be required to give to your bankruptcy trustee the money that you had paid to this creditor. So for example, if you paid your mother $1,000 to pay off a debt you owed her, and then six months later filed a bankruptcy case, your trustee could likely require her to pay that $1,000 to the trustee. That $1,000 would then be divided by the trustee among your creditors as prescribed by law (with your mother likely getting just a tiny portion of it, based on her pro rata share of all your debts).

That $1,000 is called a “preference” or a “preferential payment,” which the trustee can undo, or “avoid.” You are considered to have paid that creditor in “preference” to your other creditors.  

The Harsh Practicalities of Preferences

The result is that your good intentions backfire. You want to be considerate to a special creditor—often a family member, your long-time family doctor, or some other kind of favored creditor–by paying off that debt and keeping it out of your bankruptcy case. You may have wanted this creditor not to know about you filing bankruptcy. Or you may have just wanted to take care of your moral obligation.

But the result becomes the opposite. Your favored creditor gets mixed up in the bankruptcy case, and in a way more embarrassing than would have been otherwise. He or she has to give up the money you paid—and may have to scramble to come up with it somehow after having spent it. After that, you may well continue to feel that you have a family or moral obligation to make good on that debt, so you end up paying that debt to your favored creditor a second time, after your bankruptcy is over. And finally, if your bankruptcy is a Chapter 13 case then you would not even be allowed to do that until the case was over 3 to 5 years later. A mess all around.

The Good News—It’s Preventable

This mess can be avoided altogether if you get legal advice from an experienced bankruptcy attorney before you make the preferential payment(s) to your favored creditor. Or even if you’ve already made the payment(s) by the time you see your attorney for the first time, there are often ways to get around it.

Careful, though, because the law about preferences is complicated. Section 547 of the Bankruptcy Code on preferences is a head-scratcher. It’s about 1,300 words long, containing 56 sub-sections and sub-sub-sections. Take a look at it and you’ll see it’s certainly not clear.

What is clear that if there is any chance that you may be filing a bankruptcy case within a year, before paying anything to a relative, friend, or any other special creditor that you feel obligated to pay, talk first to an experienced bankruptcy attorney. Especially do so if you figure this does not apply to you because you don’t consider the person you are paying to be a “real” creditor—because it’s a “personal debt,” was never put into writing, or nobody knows about it.

And most importantly, if you’ve already made such a payment before you see your attorney, absolutely be sure that you disclose that to him or her, and do so right away, early at the first meeting. It could well affect your game plan, and maybe the timing of your bankruptcy filing.

Preferences are mostly a problem when they only come to light AFTER your bankruptcy is filed. Be sure to be candid with your attorney so that does not happen to you. Avoid that and most likely preferences will not be a problem for you. 

The “automatic stay” gives protection for you and your assets that is awesomely fast. And very broad. Don’t take it for granted.


The last two blogs have dug into the relatively rare situations in which the “automatic stay” does not protect you or your assets. But it’s important to understand that those are unusual exceptions. Almost all the time, the moment your bankruptcy case is filed all creditors must immediately stop every possible kind of collections effort against you.

Awesomely Fast Protection

The automatic stay goes into effect simultaneous with the filing of your bankruptcy petition. The “petition” is the document “commencing a case under [the Bankruptcy Code].” Sections 101(42) and 301(a). So the very act of filing the petition itself “operates as a stay.” Section 362(a).

The instantaneous effect of the automatic stay is amazing especially in comparison to most other court procedures. Most take weeks, or even in the case of emergencies at least days or hours. Usually some kind of request or motion needs to be filed to get the court’s attention, the other side is given some opportunity to respond, and then there may be a hearing of some sort, before finally a judge makes a decision.

But the automatic stay skips all that. It is, at least at the beginning, completely one-sided, in your favor. You “win” an immediate court order, without the creditors having any immediate say about it, without involving a judge at all.

So the automatic stay gives you an immediate breathing spell, freezing all collection efforts against you, whether your creditors like it or not.  

Awesomely Broad Protection

This break from your creditors covers “any act to collect, assess, or recover” a debt—just about anything a creditor could do to.

Besides stopping all collection phone calls and bills, the automatic stay stops all court and administrative proceedings against you from starting, or from continuing. If your bankruptcy is filed right before a lawsuit is to be filed at court against you, the lawsuit can’t be filed. Same with a home foreclosure. A prior judgment against you can’t result in your paycheck or bank account being garnished. If you’re behind on your vehicle loan payments, the repo man can’t come looking for your vehicle. If you owe back income taxes to the IRS, it can’t record a tax lien against your home and vehicle.

The automatic stay is powerful stuff.

“Relief” from the Automatic Stay

Any creditor can ask the court to cancel the automatic stay so that the creditor can again take action against you, your assets, or the collateral in particular. The most common situation for this is a creditor asking for the right to take back the collateral securing the debt—to repossess a vehicle or to start or continue a home foreclosure. Whether or not the court will give it this right, or give “relief from stay” in any situation, depends on all the details of the case. It requires a careful analysis to be done by and discussed with your attorney. 

Very rarely, the filing of a bankruptcy will NOT stop the creditors from chasing the debtor. Here’s how to avoid this happening to you.


The Essential “Automatic Stay”

In just about every bankruptcy case, stopping creditors from pursuing you and your assets is a crucial part of what you get for filing the case—regardless whether it’s a Chapter 7 or Chapter 13 case. This benefit of filing bankruptcy—called the “automatic stay”—generally applies to every case, to every creditor, and to just about to everything that a creditor can do related to collecting a debt.

Exceptions to the “Automatic Stay”

In our last blog we explained some narrow exceptions, which only apply to a narrow set of creditors and to a narrow set of their actions.

Today’s blog is about a very different kind of exception to the “automatic stay,” one that, although very rare, is potentially very dangerous because it could result in this crucial benefit not applying to your case at all. As a result your creditors could continue chasing you and your assets as if you had not even filed a bankruptcy case.

You absolutely want to avoid this from happening. And it’s usually not hard to avoid it.

This Dangerous Exception Only Applies if You Had a Previous, Recent Bankruptcy

If you are now considering filing bankruptcy, AND YOU HAVE NOT FILED a prior bankruptcy case within the last year which was dismissed (thrown out by the court), then this exception will not apply to you. You need to be absolutely sure about this, so please finish reading this blog to make sure.

The Rationale for This Rare Exception

Before these rules were enacted, a very small minority of people filing bankruptcy would file a series of separate cases, one after another, with the intention each time of using the new “automatic stay” of each new case to repeatedly delay a foreclosure or some other collection action.  Congress decided that this was an inappropriate use of the bankruptcy laws, and put a stop to it by taking away the benefit of the “automatic stay” as follows.

The Two Rules

The First Rule: The “automatic stay” WOULD NOT go into effect at all when filing a new case if within the past year you had filed two or more other bankruptcy cases, and those earlier cases had been dismissed.  If this were to happen, the “automatic stay” COULD potentially still be applied to your case after filing but only by convincing the bankruptcy judge that you meet certain conditions.

The Second Rule: The “automatic stay” WOULD go into effect filing a new case if within the past year you had filed one other bankruptcy case, which was dismissed, BUT the “automatic stay” would expire after 30 days. Its expiration COULD be avoided, but only by convincing the bankruptcy judge that you meet certain conditions.

The conditions referred to above that you’d have to meet for imposing or preserving the “automatic stay” involve justifying why the previous case(s) was (were) dismissed and why the present case is being filed. (The details of these conditions are complicated and beyond what can be covered in this blog.)

Watch Out to Make Sure of No Prior Recent Bankruptcy

Be careful because sometimes people can file a bankruptcy case and have it dismissed without realizing or remembering what happened. For example, if someone files a bankruptcy case without an attorney, and somehow does not complete it, the case would get dismissed. Or is someone does hire an attorney and the case gets filed, because of some miscommunication the case could get dismissed. Either way, months later when this person wants to file bankruptcy he or she could not understand or recall that in fact a case did get filed and dismissed.


Avoid this problem by thinking carefully about whether there is any possibility that a bankruptcy case was filed in your name in the past 365 days. And if it possibly happened, tell your attorney about it right away. 

Virtually all actions by creditors to collect the debts you owe are stopped the minute you file bankruptcy. Here are some special exceptions.  

The “Automatic Stay”

The immediate stopping of collections—called the “automatic stay”—is one of the most important benefits of filing bankruptcy. It’s automatic because it is put into operation by the mere act of filing bankruptcy. It doesn’t need any action by the bankruptcy court or anybody else to become effective. Its purpose is to stay, or stop, all collections.

Because the “automatic stay” is a benefit that a person filing bankruptcy counts on so much, it is very important to understand its exceptions—situations in which a creditor can continue acting in spite of your bankruptcy filing.

The Exceptions

The exceptions all apply to very specific kinds of creditor actions, done by very specific kinds of creditors.

1. Criminal Matters:

A district attorney or other governmental authority can start or continue a criminal case against you. That means that any step of a criminal case against you can proceed regardless of your bankruptcy filing: you can be indicted, tried, and sentenced, and incarcerated.

On a practical level it’s important to realize that this exception doesn’t just apply to felonies and misdemeanors, but sometimes also to mundane matters that you might not consider “criminal” like traffic infractions. These may even differ state by state.

In many other areas, the line between criminal and civil proceedings, and between criminal and civil debts, can get hazy. Examples are an employee’s embezzlement, a vehicle repair shop’s illegal disposal of its hazardous waste, and a bar fight. Each of these could involve either criminal charges or civil claims, or both.

Be sure to tell your bankruptcy attorney about anything unusual such as these, so that you are both prepared for any criminal proceeding that would not be stopped by your bankruptcy case.

2. Family court:

Your ex-spouse, or soon-to-be ex-spouse, or somebody on his or her behalf, can start or continue various kinds of divorce and family court proceedings:

  • to establish paternity of a child
  • to determine or change the amount of child or spousal support to be paid
  • to resolve child custody or visitation issues
  • to address domestic violence disputes
  • to dissolve a marriage (but marriage dissolution cannot include a determination about how assets or debts would be divided between the spouses)

3. Collection of Child or Spousal Support:

  • ongoing support can continue to be collected by its payee, directly or through support enforcement agencies, regardless of any kind of bankruptcy filing
  • unpaid support arrearage can also start or continue to be collected, at least in spite of a Chapter 7 filing:
    • through wage withholdings
    • garnishment of bank accounts
    • seizure of a tax refunds
    • suspension of a driver’s licenses (both regular and occupational)
    • suspension of virtually all other licenses issued by the government, including occupational and professional licenses, and even hunting or other recreational licenses.
    • In contrast, a Chapter 13 filing CAN stop these aggressive methods of collecting unpaid support arrearage, as long as the debtor strictly follows a number of steps—most importantly, starts making the regular support payments right away, arranges to pay the arrearage in full through the Chapter 13 plan, and actually pays everything as proposed.

4. Taxes:

Taxing authorities can:

  • start or finish a tax audit
  • can send you a notice that you owe taxes
  • can demand that you file your tax returns
  • can assess your taxes and send a demand that you pay them (but do no more)
  • in very limited situations can even file a tax lien

To emphasize, the automatic stay stops almost all actions against you by almost all creditors. But if you are involved in any court proceeding or collection efforts by the criminal or taxing authorities, or by an ex-spouse or support enforcement agency, you need to be especially familiar with these exceptions. 

The U.S. Constitution makes bankruptcy a federal procedure. So how come it’s different in every state because of the property you can protect?

The Constitution makes it sound like a bankruptcy case should be the same in every state. It says that Congress has the power “to establish… uniform Laws on the subject of Bankruptcies throughout the United States.” Article 1, Section 8, Clause 4.

But bankruptcies don’t sound like they are governed by “uniform Laws” if the residents of one state get to exempt (protect) way more of what they own than residents of another state. For example, you can exempt only $5,000 of value in your home if you live in Mobile, Alabama (Ala. Code Sect. 6-10-2), but if you live an hour’s drive to the east on I-10 in Pensacola, Florida, you can exempt an unlimited amount of value in your home (Art. X, Sect. 4, Fla. Const.).

How can the supposedly “uniform” bankruptcy laws be applied so differently in different states?

A Compromise

The reason is that the current law—created in the late 1970s—is a major political compromise involving the most basic tension in the Constitution– states’ rights versus federal power. (Remember, we fought the Civil War about this.)

The issue here is whether a federal set of property exemptions would be required for everyone throughout the country filing bankruptcy, or whether instead each state would be able to create its own separate exemptions to be applied to their residents filing bankruptcy. The compromise—quite firmly in favor of states’ rights—is that the Bankruptcy Code does contain a federal set of exemptions, but each state is allowed to “opt-out” of those federal exemptions and require its residents to use that state’s exemptions when filing bankruptcy.  

So, if you live in one of 32 states, you cannot use the federal exemptions. Instead you must use your state’s separate set of exemptions. In the remaining 18 states and the District of Columbia, you can use either the federal or local exemptions.

A Long Time Coming

Before this was settled, it was probably the most contentious issue in bankruptcy law. In fact, it’s a big part of why we didn’t even HAVE a bankruptcy law during most of the 1800s.

Throughout that century, an ongoing political and economic fight raged between bankers mostly in the Northeast against farmers and small merchants mostly in the South and West. Because of regular cycles of financial “panics,” the farmers and merchants endured a pattern of losing their homes and farms to out-of-state creditors. Because of this, the first law exempting certain property from creditors was adopted in 1839 in Texas even before it became a state. From this exemption laws spread quickly through the South and the Midwest during the 1840s and 1850s.

Three different times during this same century, Congress passed a set of bankruptcy laws, each time to address the fallout from one of the reoccurring financial panics. But none of the bankruptcy laws stayed in force for long, expiring or being repealed as soon as the economy improved. With no federal bankruptcy law in effect most of the time, various kinds of state laws tried to fill the gap in various ways, including through property exemptions.

The first “permanent” bankruptcy law was passed in 1898, but it could only muster enough votes in Congress by letting states continue to use their own system of exemptions for bankruptcies filed by their residents.

So our latest late-1970s compromise was a long time coming. Some in Congress wanted to continue using state exemptions as in the 1898 law, while others wanted a mandatory uniform federal system.  The compromise was that each state was given a choice: it could let its residents file bankruptcy using EITHER a new set of federal exemptions or the state’s exemptions, OR each state could require its residents to use the state’s exemptions.

The end result is that in every state’s residents are either allowed or required to use their state’s exemptions, while in 18 states residents also have the option to use the federal exemptions. Between states’ rights and federal power, it sure looks like this favors states’ right. The result is that bankruptcies can look quite different from one state to another, in spite of the “uniform Laws” requirement in the Constitution. That’s certainly true if you own a home with a sizeable amount of equity on one side of the Alabama-Florida border versus the other.