PA vs. Federal Bankruptcy Laws: Which is Best for You?

Filing for bankruptcy is one of the most significant financial decisions a person can make. It is a legal tool designed to provide relief to honest debtors, but the process can feel overwhelming. One of the first and most critical questions you will face when filing in the Commonwealth is determining which set of laws will govern your property: Pennsylvania bankruptcy laws or federal bankruptcy laws.

While bankruptcy is technically a federal court process, the specific rules regarding what property you can keep — known as “exemptions” — can vary, and the legal team at the Law Office of Michael Schwartz can help. In Pennsylvania, unlike in some other states, you have a choice. You can choose to follow the state’s exemption list, or you can choose the federal list. You cannot mix and match.

Understanding the difference between these two systems is crucial because the “right” choice depends entirely on your specific assets, your marital status, and the type of property you own.

Understanding the Exemption System

When you file for Chapter 7 bankruptcy, the goal is often to discharge your debt while keeping as much of your necessary property as possible. Exemptions are laws that prevent creditors from taking specific assets up to a certain dollar amount. In a Chapter 13, the exemptions prevent assets from counting towards the analysis when determining how much debt will need to be repaid through a chapter 13 plan.

Because Pennsylvania is a “choice” state, you have a unique strategic advantage. You can analyze both sets of laws and select the one that offers you the most protection. However, making the wrong choice could leave significant assets, such as your home or vehicle, exposed to liquidation (Chapter 7) or require a higher payment plan (Chapter 13).

Key Differences in Property Exemptions

The primary differences between the two systems usually come down to three major categories: your home, your car, and your “wildcard” assets. Generally speaking, the federal exemptions are more generous for individuals with equity in their home and car, while Pennsylvania bankruptcy laws offer unique protections for married couples and specific financial accounts.

1. Does Pennsylvania have a homestead exemption?

No, Pennsylvania does not have a specific homestead exemption.

Under federal bankruptcy laws, there is a specific homestead exemption that allows you to protect a significant amount of equity in your primary residence. As of the most recent adjustments, this amount is approximately $27,900 for an individual, though it will grow to $31,575. 

If you choose Pennsylvania state exemptions, you cannot protect equity in your home using a homestead exemption because one does not exist. However, this does not necessarily mean you will lose your home under state law (see the section on Tenancy by the Entirety below).

2. Can I protect my car under PA law?

Pennsylvania laws do not include a specific exemption for motor vehicles.

If you have equity in your vehicle (meaning the car is worth more than what you owe on it), the federal exemptions are typically the safer route. The federal system offers a specific motor vehicle exemption of roughly $5,025 for one vehicle.

3. What is the “Wildcard” exemption?

The “wildcard” exemption is a catch-all provision that allows you to apply an exemption amount to any property of your choosing — cash, tax refunds, expensive electronics, or extra equity in a car or home.

• Federal Bankruptcy Laws: The federal system offers a generous wildcard exemption. It typically consists of a base amount plus any unused portion of the homestead exemption, totaling over $13,000 in potential protection for any asset.
• Pennsylvania Bankruptcy Laws: The state wildcard exemption is very small—typically around $300. This offers very little flexibility for protecting miscellaneous assets.

When Pennsylvania State Laws Are Stronger

Given the lack of homestead and vehicle protection, you might wonder why anyone would choose the state exemptions. The answer usually lies in two specific areas: joint property for married couples and retirement assets.

How does “Tenancy by the Entirety” work?

This is the most powerful tool in the Pennsylvania exemption arsenal. Tenancy by the Entirety is a form of joint ownership reserved for married couples.

If you and your spouse own your home (or other property) as “tenants by the entirety,” and only one of you is filing for bankruptcy, the equity in that property may be 100% exempt from the filing spouse’s creditors. This applies regardless of how much equity is in the house.

For example, if a husband files for bankruptcy due to credit card debt solely in his name, but he owns a house jointly with his wife, the house is generally protected from the husband’s creditors under PA law. Federal exemptions do not offer this specific common law protection to the same extent.

Are retirement and insurance protected?

Both state and federal laws offer protection for retirement accounts, but Pennsylvania’s exemptions can be particularly strong regarding life insurance policies and annuities. In some specific cases, state law provides broader coverage for insurance proceeds or specific types of retirement plans that might face caps under federal regulations.

How to Choose Between State and Federal Exemptions

Deciding between Pennsylvania bankruptcy laws and federal bankruptcy laws is not a guessing game; it is a math equation.

You might lean toward Federal Exemptions if:

• You are single.
• You have equity in your home (but less than the federal cap).
• You have equity in a vehicle.
• You have a significant tax refund or cash you need to protect using the wildcard.

You might lean toward Pennsylvania Exemptions if:

• You are married, but filing individually.
• You own a home jointly with your non-filing spouse (Tenancy by the Entirety) and unsecured debt is not in joint names.
• You have no equity in your home or car, but have specific insurance or annuity assets that state law protects better.

Navigating Your Financial Future

Bankruptcy is designed to be a fresh start, not a punishment. The ability to choose between exemption systems ensures that you can maximize your protection, but it requires careful legal analysis. What works for your neighbor might be the wrong choice for you.

Because the stakes are high — potentially involving the loss of a home or vehicle — it is highly advisable to consult with a qualified bankruptcy attorney. They can review your assets, apply the current exemption amounts, and guide you toward the system that best secures your financial future.

If you are struggling with debt and need guidance on your options, contact the Law Office of Michael Schwartz today.