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    Chapter 7 Bankruptcy

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    Bankruptcy Laws in Pennsylvania

    In an ideal world, bankruptcy filings would be similar. And people filing in Florida would have to live by the same rules as people who file in Pennsylvania. Unfortunately, the rules were made by politicians and lawyers, so they are not that simple. While federal law dictates the rules and procedures of federal courts, including federal bankruptcy courts, there are state-level rules that determine eligibility for filing and what property you end up with at the end of the typical Chapter 7 filing — the most popular type of filing where you keep some of your assets, but anything extra is sold off to pay your debt and you emerge with a clean slate.

    The state-level rules exist because the cost of living varies greatly by state — someone making $50,000 in New York City is living in poverty, while someone making $50,000 in Allentown, Pennsylvania is probably living a little more comfortably. Instead of trying to set a universal standard, they have left it to the state to determine what property you keep (though thankfully, Pennsylvania is one of the states that gives you a choice between their rules and some default federal rules) and the bankruptcy courts have localized the income limits for filing as well.

    If all of that sounds complicated, it’s because it is. As we said, it would all be a lot easier if they had universal rules across every state. Fortunately, we will break it down step-by-step to get you comfortable with the topic, and we recommend that you discuss maximizing your exempt property and any questions you have about these rules with an attorney.

    The bankruptcy courts may be federal, but the most important rules vary by state — Pennsylvania determines your eligibility and exempt property.

    Bankruptcy starts with a filing on a clerk’s desk in federal court. But, before you can even enter that door or know what to put in that paperwork, you have to look at your state-level rules. While the end product of bankruptcy and the rules in federal court are very similar — nearly identical — between states, the rules for eligibility and property exemptions differ for a Pennsylvania resident compared to a New Yorker.

    Pennsylvania Means Test

    The most common form of bankruptcy filing is a Chapter 7 bankruptcy. This is your traditional filing, where your excess longings are sold off to pay down some of your debt, and the rest of your debt is dismissed, evaporated, destroyed, or obliterated. In the end, you have a few last things but you have a fresh financial start on your future.

    But, not everyone is eligible to file for bankruptcy. Rich people aren’t. And people who the court judges to have the means of paying off their debt can’t file a Chapter 7 — if they want to file for bankruptcy because they are struggling with debt, they have to look to chapter 13, which is more about payment plans than actually eliminating debt.

    To file for Chapter 7 bankruptcy, you must pass a two-part means test.

    The means test starts with a look at your household income. If your household income is below the median for Pennsylvania, you’re eligible to file for bankruptcy. As of May 2022, the figure was $60,640 for a single filer and a greater amount for families.

    If your income was higher than that threshold, you must pass the second part of the test, which is a look back at your last six months of income: after paying for necessary living expenses such as rent and food, how much do you have left over? This is called your monthly disposable income. Under this test, you likely qualify for Chapter 7 bankruptcy if your disposable income is minimal or zero. (Your bankruptcy form will instruct you to multiply your disposable income by 60 months and compare that against the current limit for disposable income which is on the bankruptcy forms. In addition, if your disposable income is enough to cover at least 25% of your unsecured debt, you may also be ineligible.) But, before diving into your bankruptcy application, or assuming that you are ineligible, check with an attorney to confirm your eligibility.

    Pennsylvania Bankruptcy Property Exemptions

    If the idea of liquidating your assets — selling everything off to pay off some of your creditors — is a terrifying thought, that is completely understandable in you are not alone. Many people picture the elderly gentleman from monopoly with his pockets out and no property to his name when they think of bankruptcy. That is not exactly true — though you will have to forfeit some assets.

    Pennsylvania sets its own set of rules for what property is “exempt” from forfeiture as part of your bankruptcy. These property exemption rules will tell you how much of your home, clothing, vehicle, and other personal property you get to keep. Fortunately, Pennsylvania is also one of the states they give you additional flexibility by allowing you to opt into using the federal set of property exemption rules as well — with the guidance of an experienced attorney, you can pick the set of rules that is best for you and your situation, though we suspect that after looking at Pennsylvania’s rules that you will likely want to choose the federal rules instead.

    Pennsylvania has Very Limited Exemptions

    While Pennsylvania did go through the effort of passing some bankruptcy exemptions, you will likely be unimpressed with what they came up with: you can keep any single item of your choice up to $300 in value (the wildcard exemption). Beyond that, you can keep your personal property such as Bibles and schoolbooks, sewing machines, uniforms, and clothing. There are additional limited exemptions for unpaid weekly wages and retirement accounts (so long as the deposits were made 12 months prior to filing).

    Notice anything missing? How about everything? There are no exemptions for your house, your car, or the tools of your trade. Pennsylvania lawmakers expect you to emerge from bankruptcy homeless, immobile, and unable to earn a living. But don’t be discouraged — there are still federal rules around to save you.

    Federal Rules are More Generous

    We won’t go too far into the federal exemptions, because we have covered them separately, but let’s take a quick peek so you know why we think most people are better off with the federal rules:

    •         Your home is exempt up to $27,900 (double that for married couples filing jointly)
    •         your car is exempt up to $4000
    •         jewelry is exempt up to $1700
    •         tools of the trade are exempt up to $2525
    •         the wildcard exemption is $1325 plus the unused portion of the homestead exemption up to $12,575
    •         personal belongings are exempt up to $625 per item

    As you can see, the federal rules are almost always going to be better for you than the Pennsylvania State rules — the federal wildcard exemption alone is worth more than the Pennsylvania exemptions combined, in many cases.

    For more on the federal exemptions, check out our breakdown of that rule set.

    Retirement Benefits

    If you are concerned about your income in retirement, such as a pension or your accrued 401(k), IRA, or other deferred compensation accounts, know that most accounts have very solid protections under both federal and state law. As we mentioned, Pennsylvania exempts deposits in your retirement accounts so long as they happened more than 12 months before filing. Under federal rules, all of your account balances are exempt up to $1.28 million in value.

    Some accounts may not be exempt, and some limits exist if you choose Pennsylvania exemptions over federal exemptions, so if you are relying on your retirement income, it is especially important to discuss this with a lawyer before assuming that your nest egg is exempt from liquidation for the benefit of your creditors.

    Exemptions are Complex: Get Professional Help

    After reading about these exemptions, it may seem like an easy decision to go by the federal rules. However, even in the federal rule set, there are limits on different types of properties, as well as a complicated wildcard exemption that may protect otherwise un-protectable assets. These exemption rules determine everything from whether you can file to whether you will have retirement income and  home after you are done filing. It is not an exaggeration to say that these are the most important rules that you have to play by in bankruptcy court. This is where expert advice from a bankruptcy attorney can pay off — your attorney can help you maximize the amount of exempt property and set you up for a strong financial future after filing. For expert advice, schedule a consultation with one of our network attorneys.


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