What Are Bankruptcy Exemptions and Can They Be Amended in Pennsylvania and New Jersey?

When filing for bankruptcy, one of the central themes of bankruptcy law is to provide people with a fresh financial start. Central to that idea is that they need not be destitute when filing. Thus, the Federal Bankruptcy Exemptions were created by Congress to allow bankruptcy filers to retain a certain amount of personal and real property, also known as “exempt” property.

While not all states allow the federal exemptions, for purposes of this blog article, we are limiting our discussion to these states that allow the federal exemptions. It is important to note that in Pennsylvania and New Jersey, you are allowed to elect state exemptions in lieu of the federal exemptions. However, in most instances, the federal exemptions are chosen.

If you are filing for bankruptcy in Pennsylvania or New Jersey, an experienced bankruptcy attorney at Young, Marr, Mallis & Associates can help. Call our Pennsylvania offices at (215) 701-6519 or our New Jersey office at (609) 755-3115 for a free consultation today.

What Property is Exempt From Bankruptcy in PA and NJ?

Bankruptcy exemptions determine what property and how much property you can keep when filing a consumer bankruptcy.

Federal Bankruptcy Exemptions

The amounts allowed under the federal bankruptcy exemptions are governed under 11 USC §522(d). These exemptions allow a filer to have certain amounts of equity in both real and personal property. At the time of filing, these exemptions are noted in the filer’s bankruptcy petition.

These exemptions include equity in real estate, motor vehicles, household goods, jewelry, as well as other personal items. Furthermore, in almost all instances, an exemption is allowed for a tax-exempt pension or retirement account, unmatured life insurance, and a non-homeowner is allowed an additional exemption known as a “wildcard” exemption to exempt any property that is not specifically enumerated in the code.

State Bankruptcy Exemptions

In addition to the federal bankruptcy exemptions, states may offer their own exemptions. Some states allow petitioners to claim a combination of federal and state exemptions. Other states require you to choose one or the other, but not both. As such, you may need to carefully consider which exemptions you choose, as there may be key differences between state and federal exemptions.

In Pennsylvania, various exemptions are offered, although the federal exemptions are often worth more. These include protections for retirement accounts, vehicle exemptions, and wildcard exemptions that may be applied to various properties or assets. Pennsylvania does not offer a homestead exemption.

New Jersey also offers exemptions for your home, vehicle, retirement accounts, and wildcard exemptions, among others. The value of these exemptions may not be the same as the federal exemptions, and you should carefully consider which exemptions will work best for your financial situation.

Remember, Pennsylvania and New Jersey do not allow petitioners to mix exemptions. You must choose entirely state or federal exemptions, not both.

Can Bankruptcy Courts Stop You from Claiming Exemptions?

Not everyone knows about exemptions when filing a bankruptcy petition, and they might mistakenly fail to claim them. In the past, courts could disallow petitioners from claiming bankruptcy exemptions, but that is no longer possible.

Law v. Segal

The landscape of bankruptcy exemptions changed after the Supreme Court decided Law v. Segal. In that case, the Supreme Court considered whether bankruptcy courts have the authority to order that the debtor’s exempt assets be disallowed for concealment or non-disclosure under the broad equitable provisions of §105 of the Bankruptcy Code.

The Supreme Court concluded that the Bankruptcy Code did not have authority under its equitable powers to disallow a claimed exemption that would otherwise be exempt under the Bankruptcy Code’s exemptions section, even in cases where the debtor engaged in inequitable or fraudulent conduct, i.e., in bad faith.

Revoking Exemptions as a Sanction on Bankruptcy Petitioners

Thus, the Court determined that federal law provides no authority for Bankruptcy court’s to deny an exemption on a ground not specified in the Code. Thus, the Supreme Court recognized that “whatever other sanctions a Bankruptcy Court may impose on an honest debtor, it may not contravene express provisions of the Bankruptcy Code by ordering that the debtor’s exempt property be used to pay debts and expenses for which that property is not liable under the Code.”

It appears Law v. Segal provided the death of the equitable disallowance of a bankruptcy exemption based upon fraud. Subsequent to Law, most other circuits (including the Third Circuit) had concluded that Law v. Segal places a broad prohibition against denying a debtor’s exemption, even based upon bad faith or prejudice.

How Do You Claim Bankruptcy Exemptions?

Claiming bankruptcy exemptions can be a bit confusing, and it may be easy to make a mistake. Your attorney should advise you on available exemptions, how they can help you, and how to claim them.

Including Exemptions in Your Petition

Exemptions should be claimed when we first file your bankruptcy petition. The exemptions we claim must align with the assets and properties we disclose. For example, if you do not disclose that you own your home, you cannot claim a homestead exemption.

However, if exemptions are not claimed or claimed incorrectly when you first file your petition, your attorney may be able to help you amend the exemptions. This may be possible only if the mistake was due to excusable neglect rather than bad faith or fraud.

Review Your Assets with a Lawyer

It is imperative that you review all your assets and property with your bankruptcy lawyer before you file your petition. Your attorney should know about all available exemptions, how they can help you, and how to claim them.

Choose Federal or State Exemptions

In Pennsylvania and New Jersey, bankruptcy petitioners must either claim entirely state exemptions or entirely federal exemptions. You may not pick and choose exemptions from both categories.

As such, you must review your assets with your lawyer. While some exemptions might be better under one category, claiming multiple exemptions from the other category could be more beneficial.

Can You Amend Bankruptcy Exemptions After the Case Has Been Filed?

So, where does a debtor now stand if an asset was not listed in a filing and was later discovered by the Trustee or US Trustee? The question clearly becomes an issue of timing.

Time for Claiming Exemptions

Pursuant to the Law case, if an asset is discovered during an initial filing, it can still be exempted at any time prior to the close of the case, regardless of the reason for the non-disclosure. This directly contradicts the law in most jurisdictions prior to this Supreme Court decision.

However, one specific caveat has developed. Many courts have recently examined whether the same rules apply to reopened cases. In these courts’ analyses, courts have seemed to reconcile the Law v. Segal decision with Bankruptcy Rule 9006, which allows the Debtor to amend Schedules in a reopened case only if the Debtor establishes that the failure to amend before the closure was the result of “excusable neglect”.

Claiming Exemptions in Reopened Bankruptcy Cases

The Third Circuit in In re Paylor, as well as many other Circuits, has determined that a Trustee could deny a Debtor’s right to their exemption or “disallow” a Debtor’s exemption in a reopened case if the failure to include the asset was based upon bad faith rather than excusable neglect.

Since the Law v. Segal determination, it seems that a debtor will be allowed to amend his exemptions at any time prior to the closing of his case, even if the asset was not disclosed. Of course, other potential remedies, such as an objection to discharge or criminal prosecution, may still be available to the Trustee/US Trustee. However, it’s clear that a different standard will apply upon an application to reopen a case for purposes of exempting a non-disclosed asset. In that instance, it seems that, similar to the landscape pre-Law v. Segal, it will be necessary that a debtor demonstrate that the failure to disclose the asset was based upon excusable neglect rather than bad faith.

FAQs About Bankruptcy Exemptions in Pennsylvania

What Are Bankruptcy Exemptions?

Bankruptcy exemptions are special laws designed to allow bankruptcy petitioners to protect certain assets from the bankruptcy process. For example, when filing for Chapter 7 bankruptcy, a petitioner could lose their home to liquidation. A homestead exemption under federal or state bankruptcy laws may allow the petitioner to shield a certain amount of their home’s equity from the bankruptcy process. Numerous bankruptcy exemptions exist, and your attorney can help you elect the exemptions that help you the most.

Can Bankruptcy Exemptions Be Amended?

Under the caselaw established by the U.S. Supreme Court in Law v. Segal, bankruptcy courts may not prevent petitioners from amending their petitions to include exemptions that were not claimed when the petition was initially filed. However, if a bankruptcy case is reopened after it has closed, exemptions may be amended only because of “excusable neglect.” Put another way, you may amend exemptions only if they were not claimed or claimed incorrectly because of a minor error.

Can a Bankruptcy Court Stop You from Amending Exemptions?

Generally, no. For an initial petition, you may amend exemptions at almost any time prior to the closing of the case. If the case is reopened, you may amend exemptions only for reasons related to “excusable neglect.” If the court believes that a petitioner’s failure to claim exemptions is due to some fraud or bad faith, it may disallow the petitioner from amending them.

When Do You Have to Claim Bankruptcy Exemptions?

It is best to claim bankruptcy exemptions when you first file your petition. If exemptions are not claimed by mistake, it is possible to amend them, but the court will scrutinize your case more. If the court believes your amendment is related to bad faith rather than excusable neglect, it might refuse to allow you to amend the exemptions. In short, claim exemptions early and review your case with a lawyer to make sure the exemptions are claimed correctly.

What Should You Do if You Accidentally Failed to Claim a Bankruptcy Exemption?

If you failed to claim a bankruptcy exemption by mistake, talk to your lawyer about it immediately. The sooner we attempt to correct the mistake and amend the exemption, the better. Courts are willing to allow you to amend if we can show the mistake was just that, and an honest mistake.

How Are State and Federal Bankruptcy Exemptions Different?

Exemptions are available at the state and federal levels, but they differ. While certain exemptions overlap, they may differ in their value. For example, the federal government and New Jersey offer homestead exemptions, but they are valued differently. Pennsylvania does not offer a homestead exemption, and homeowners may want to instead claim federal exemptions. Which one you claim depends on how much equity you have and how much you wish to protect.

Additionally, many states require that you choose either all federal exemptions or all state exemptions, not both. If you plan to claim multiple exemptions, you must carefully consider which ones to claim, as you cannot claim from both categories.

Bankruptcy Lawyers Serving Pennsylvania and New Jersey

If you or a loved one is filing for bankruptcy, talk to a Lower Makefield bankruptcy attorney at Young, Marr, Mallis & Associates today. For help with your case, contact our law offices online today or call us at (215) 701-6519 in PA or (609) 755-3115 in NJ for a free consultation.