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State vs. Federal Law in Federal Bankruptcy Cases

State vs. Federal Law in Federal Bankruptcy Cases

Since the United States was founded there has been a fascinating relationship between state and federal laws. With the attempt to limit federal overreach, each state was allowed to keep certain functions of their own operation. The core idea behind this was to prevent the notion of “big government.” What has happened in recent years is that there have been several new legal concepts that have had trouble successfully adapting to this model of state vs. federal model. A classic example of a body of law that greatly differs between state and federal is Bankruptcy Law.


A Basic Understanding of Bankruptcy Law

For individuals, there are two routes to pursue when they are filing for Bankruptcy. One is Chapter 7 and one is Chapter 13. An individual should absolutely know the differences between these two types of Bankruptcy Laws in order to choose the best option specific to their individual circumstances. The major difference between Chapter 7 and Chapter 13 is that Chapter 7 allows the debtor to liquidate their assets in order to satisfy their debts. Chapter 13 allows the debtor to keep their assets but find ways to settle their debts overall.


The Primary Differences Between State and Federal Bankruptcy Law

When choosing whether to pursue your case through federal or state law, it is important to know the differences between the two and how they could help or hinder your individual situation. Here are three basic differences between state and federal law listed below:

  • Federal and State Bankruptcy Laws Do Not Rule on Identical Issues: Even though a case may have originated in the federal sector of Bankruptcy Law, the federal government does have some issues touching the individual's assets due to the protections that many states provide to their citizens. The purpose of this is to allow the debtor to not become completely insolvent as a result of the bankruptcy proceeding. An example of how states tend to protect their citizens from the wrath of the federal government is to include “exemptions” in their Bankruptcy Law statutes. What ends up happening, as a result, is that the citizen is protected from giving away every cent they own in physical assets especially if even doing that will not satisfy their overall debts. The purpose behind this is to allow the state citizen to exercise rights to a “financial rehabilitative process” that can help them start fresh.

  • State Exemptions Tend to Be More Generous Towards the Debtor: This is an important difference to consider when filing for Bankruptcy. It is wise to investigate what exemptions that your state provides to you and how you can use them to your advantage in order to allow yourself to gain a fresh financial start. If you do this, you should also verify if you could get away with a Chapter 13 filing instead of Chapter 7. By using the state exemptions to your advantage, a Chapter 13 filing could in fact be possible for you.

  • You May Not Be Able to Appeal State Bankruptcy Cases: One of the important advantages of filing a federal bankruptcy case versus a state bankruptcy case is that you have the option to appeal the federal case if the bankruptcy case does not go in your favor. This is an important option to consider if you are unsure whether the way you filed was proper or whether your individual situation happens to be in the “grey area” of how to proceed with due diligence.


An Even Scale…

When considering which option is best for you, it is wise to sit down somewhere and truly take note of which situation you are precisely in. It is highly recommended to consider both the advantages between filing for Chapter 7 and Chapter 13. Additionally, it is imperative to consider what your home state can provide to you versus filing with the federal government. If you weigh all of these variables into effect, you will know a better path to pursue. Additionally, if you have a lot of complex assets, it is wise to consider filing with the assistance of legal counsel. That way, you may have access to more options than you would have been able to find on your own.

The most important thing to remember when you are filing for bankruptcy is to think positive. This is something that is often missed throughout the painful process. If you simply sit down, take a deep breath, and do an honest assessment of your options, you will be amazed at how the process prospects improve for you instantly and how you will be able to see a light at the end of the tunnel for your financial future.



Jacquelyn Vadnais is a writer for Blackford and Flohr, a Maryland law firm. Jacquelyn is a JD/MBA who has worked with law firms internationally and brings great insight on a number of issues.

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Monday, 12 April 2021
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