State Bankruptcy Exemptions are Mandatory in Arizona

Many practitioners may be surprised to find that Arizona residents are legally precluded from electing to use federal bankruptcy exemptions when they file. While the lingering effects of your old ConLaw class may induce an immediate "preemption!" argument, federal bankruptcy code actually allows for this.

11 U.S.C. § 522(b) allows states that have adopted their own exemption laws to "opt-out" of the federal bankruptcy exemptions. This means that, depending on the state, a debtor may have to use the federal bankruptcy exemptions, may have to use the bankruptcy exemptions of their state, or may be permitted by the state to choose which they prefer.

Arizona, for whatever reason, has decided to prevent its debtors from using the federal bankruptcy exemptions. Ariz. Rev. Stat. § 33-1133 provides that "residents of this state are not entitled to the federal exemptions provided in 11 U.S.C. 522(d)."

The United States Bankruptcy Court for the District of Arizona explains: "Arizona is an "opt-out" state and has taken advantage of a provision in the bankruptcy law that permits each state to adopt its own exemption law, in place of the federal exemptions. Thus, those debtors filing bankruptcy in Arizona are allowed the exemptions as set forth in the Arizona statutes and federal non-bankruptcy statutes. Check the second box on the top of Schedule C, because Arizona law does not allow debtors to claim the exemptions provided by 11 U.S.C. § 522(d)."

The upside to this restriction? Arizona's exemptions are generally much more generous than the federal exemptions and, while § 33-1133 prohibits the use of federal bankruptcy exemptions, it does not prevent Arizona debtors from claiming exemptions under other federal law. This includes Veterans' benefits, Social Security benefits, and other proceeds for government or military employees. For more information, visit the Court's website at http://www.azb.uscourts.gov/.