How Bankruptcy Exemptions Work

State and Federal Bankruptcy Exemptions

The 50 U.S. states and the District of Columbia (D.C.) are the key players in personal bankruptcy filings. Each has its own set of bankruptcy exemptions. The federal government does, too, but it's the states and D.C. that decide whether citizens must use their exemptions or can opt for the federal exemptions instead. In 2014, just 20 of the 51 governments allowed residents to use the federal exemptions: Alaska, Arkansas, Connecticut, D.C., Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington and Wisconsin [source: Bulkat].

So what exemptions do states offer? All states' exemptions are similar to each other and those offered by the federal government. A few of the more common ones are insurance benefits, motor vehicles, pension/retirement benefits, residential property and trade implements, such as equipment, tools, inventory. However, the amount of the exemptions varies wildly among the governments. For example, Illinois allows you to exempt up to $2,400 in one motor vehicle; in Connecticut, it's $13,500 [source: Nolo].

In some cases, it's not clear which state's bankruptcy laws you have to follow. What if you split your time between two different homes? What if you moved to a different state shortly before or after you filed for bankruptcy? What if you live in one state but work in another? Domicile requirements determine which bankruptcy rules you follow.

Under domicile requirements, specifically the 730-Day Rule, you'll follow the bankruptcy rules of the state where you've lived, paid taxes and voted for the past 730 days, or two years. If you haven't lived in the same state for the past two years, the 180-Day Rule kicks in. This says you must look back to where you lived during the 180 days (six months) prior to the two years preceding your bankruptcy filing, then use that state's bankruptcy laws [source: Bulkat].

A final note: If you live in a state that allows you to use federal bankruptcy rules, keep in mind you can't mix and match exemptions. You'll have to choose either your state's rules or those of the feds.