Do Bankruptcy Laws Vary from State to State?

December 22, 2014

Everyone knows that attorneys are masters at avoiding direct answers to simple questions. What is not commonly known is that what may seem like a simple question can actually be many compound questions in disguise. Take, for example, the question, “Do bankruptcy laws vary from state to state?” The simple answer to this question is “no and yes.” Here’s why:

 The “no” part:

The Bankruptcy Code is a uniform law enacted by Congress that applies to all bankruptcies throughout the United States. See Article 1, Section 8, Clause 4 of the U.S. Constitution. Federal bankruptcy courts have exclusive jurisdiction over bankruptcy cases, so state courts have no authority to decide bankruptcy cases. As a result, bankruptcy laws to not vary from state to state.

 The “yes” part:

The federal law allows states to decide what real and personal property is exempt (and therefore legally protected) during a bankruptcy case. In some states you may choose either from a list of federal legal exemptions or state exemptions, and in other states you may only use state exemptions. Consequently, a Chapter 7 bankruptcy debtor in Florida may be able to keep his home and protect its equity, while a Missouri debtor in the same situation may lose the house to the Chapter 7 trustee.

Additionally, how the bankruptcy laws are interpreted and applied can vary from jurisdiction to jurisdiction. For instance, currently Chapter 7 bankruptcy debtors in the Eleventh Circuit (Alabama, Florida, and Georgia) are allowed to strip off and discharge an entirely unsecured junior mortgage (i.e. the first mortgage entirely secures the value of the property meaning the junior mortgage is not secured by any value). No other jurisdiction allows this in Chapter 7 cases. Sometimes the United States Supreme Court is asked to resolve differences between the federal circuits, and, in fact, this issue is currently on appeal to the high court.

As you can see, “simple” questions on the law are often the toughest to answer. The best way to obtain legal advice for your financial situation is to sit down with an experienced bankruptcy attorney. Your attorney can explain how state and federal laws apply and how to use those laws to get the best result in your case.

 

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