Although referred to as either a “liquidation” or “straight” bankruptcy, fewer than one in 20 experience total loss. What is the reason? Federal and state exemptions to income are accessible by creditors. State law determines whether the debtor can choose between federal and state exemptions or use only state-provided ones.
State vs. federal exemptions
Florida precludes a debtor pursuing bankruptcy under Chapter 7 from using federal bankruptcy exemptions. Classified by source, state and federal exemptions do not differ drastically in substance. The following list highlights the most important categories of exemptions:
- Homestead Exemption: Protects primary residence.
- Wages: The most significant exemption absent from federal exemptions, this protects income earned.
- Alimony & Child Support: Protects court-ordered income from both sources.
- Public Benefits: Broad range of income sources, including social security.
Statute’s classification of income determines eligibility
A recent court case highlights how a public benefit exemption—social security—does not always enjoy protection for the reasons that were initially apparent. A man filed for Chapter 7 bankruptcy in 2022 and received $1,787 monthly income from social security. The debtor received an income tax refund of more than $5,000 for tax year 2021 and subsequently applied to social security exemption to $3,751 of the refund. The trustee sought the money on the grounds that social security benefits, once withheld as tax, lose their exemption.
The court analyzed two related statutes in its decision. One law exempts social security generally from creditors without an express reference. The second law treated a federal benefit requested for withholding, such as social security, as wages from an employer. In distinguishing two cases, the court found one that addressed the same issue, i.e., whether after withholding, social security payments lose bankruptcy protection. The second law specified that withholding social security benefits is limited only for the purposes of tax collection. Since the debtor requested withholding only for tax liability, the income retains its protection.
Experience matters
Every bankruptcy under Chapter 7 has specific causes and requires its own resolution. The process and how to determine what to include and exclude complicates an already stressful situation. Attorneys with knowledge and experience can offer guidance.
