There are two types of exemptions: (i) the "federal bankruptcy" exemptions (that would be the § 522(b)(2) election on your Schedule C); and the "state law" exemptions (that would be the § 522(b)(3) election on your Schedule C). Under the Bankruptcy Code a state may "opt out" of the federal bankruptcy exemptions and thereby limit its citizens to the state law exemptions.

Pennsylvania has not opted out. Therefore, citizens of Pennsylvania may elect either the federal or state exemptions.

Although not technically exemptions, important related provisions are § 541(b)(7) which excludes from the estate any amounts withheld from your wages or received by your employer for contributions to a tax qualified pension plan, and § 541(c)(2) which excludes from an individual filer's estate any non-transferable beneficial interest the individual has in a trust.

The Federal Bankruptcy Exemptions are listed in § 522(d) and include, as of the last adjustment on 4/1/07 (the amounts are adjusted every three years) per individual, the following:

Exemption	Amount
Residential Real Property ((d)(1))	$20,200
Motor Vehicle ((d)(2))	$3,225
Household furnishings, household goods, wearing apparel, appliances, books, animals, crops, and musical instruments held for personal, family our household use ((d)(3))	$525 in any particular item, $10,775 in the aggregate
Jewelry ((d)(4))	$1,350
"Wildcard" (exempt any property) ((d)(5))	$1,075 plus up to $10,125 of any unused amount of the (d)(1) exemption
Implements, professional books, or tools, of the trade ((d)(6))	$2,025
Life insurance loan / cash surrender value ((d)(8))	$10,775
Retirement funds (to extent in a fund or account exempt from taxation under IRC §§ 401, 403, 408, 408A, 414, 457 or 501(a))	$1,095,000 (in an IRA, exclusive of rollovers, otherwise, no limit)

Also exempt are: any unmatured life insurance contract (other than a credit life insurance contract ) ((d)(7)); professionally prescribed health aids ((d)(9)); right to receive certain pension, unemployment, disability public assistance benefits, along with alimony and support (to extent reasonably necessary for support) ((d)(10)); the right to receive damages for wrongful death of a person of whom the debtor was a dependent, or for loss of future earnings, to extent reasonably necessary for the debtor's support ((d)(11)); and the right to damages for personal injury (other than for pain and suffering or actual pecuniary loss) up to the amount of $20,200) ((d)(11)).

The major Pennsylvania state exemption is in property owned jointly by a husband and wife ("entireties exemption"). However, this particular exemption is only helpful if the creditors have a claim against only one of the two spouses. The entireties exemption is not operative against joint creditors.

Pennsylvania also generally exempts pension plans (including IRAs) and insurance policies. There is a relatively nominal exemption of $300 cash (or in property).

Which set of exemptions (federal or state) you should elect (where you have the choice) depends on your particular circumstances and requires a discussion between you and your attorney.

One of the "grayer" areas of bankruptcy practice is exemption planning. The legislative comments to the bankruptcy code expressly authorize the practice (". . . the debtor will be permitted to convert nonexempt property into exempt property before filing a bankruptcy petition[; t]he practice is not fraudulent as to creditors, and permits the debtor to make full use of the exemptions to which he is entitled under the law.") On the other hand, both bankruptcy law and applicable non-bankruptcy law (including the "Uniform Fraudulent Transfer Act") prohibit transfers made with the intent to hinder, delay or defraud creditors (i.e., "fraudulent intent"). Therein lies the problem. Although Courts acknowledge that the conversion of non-exempt assets into exempt assets are not per se improper, they will disallow the exemption and/or deny the debtor a discharge if they find that conversion was made with fraudulent intent.

Courts will look at what is referred to as "badges of fraud" in determining whether a conversion of non-exempt assets to exempt was made with fraudulent intent. Commonly identified badges of fraud, in the exemption planning context, include: (i) nondisclosure or concealment of the transfer(s) related to the conversion or of the exempt asset; (ii) effecting a conversion right after the debtor had been sued or threatened with suit (or had a judgment entered on the suit); (iii) a conversion of substantially all of the debtor's assets; (iv) a conversion of more than what the Court might conclude what was reasonable or necessary in the context of the debtor's situation (the "hogs get slaughtered" test); (v) engaging in what appears to be economically irrational transfers in order to create exempt assets; and (v) using borrowed funds or the proceeds of the sale of non-exempt assets to acquire exempt assets.

While an individual filer should review the subject of exemption planning with his attorney, he must remember that any conversion involves some risk and that the larger the amount of the conversion the more likely it is that it will be attacked. The risk of the denial of discharge arising from the conversion must be balanced against the fresh start which is the goal of the bankruptcy. Ultimately the filer, in consultation with his or her attorney, must weight the costs and benefits of the exemption against the costs and risks of an attack.

Another bit of planning that is sometimes undertaken by debtors is paying down (or off) debts owed to "insiders" (such as family members or close family friends) on the eve of bankruptcy. This may include transferring assets in satisfaction of the debt. Often debtors will use assets or cash which they cannot exempt, although the transfers sometimes involve assets or cash which could have been exempted had the transfers not been made.

Preferring an insider (i.e., paying a debt owed an insider) is distinguishable from transferring cash or an asset to an insider just to get it out of the bankruptcy estate. As we said on our FAQs page, if you transfer an asset to get it out of the estate, you may lose the asset, lose your discharge, and (if you don't disclose the transfer) possibly lose your freedom. While preferring an insider creditor (provided you really owe the debt) will not subject you to a loss of discharge or loss of freedom (as long as the payment is disclosed), the payment or transfer may be subject to recovery.

Preferential payments can be avoided and recovered by a trustee in bankruptcy. Preferential payments are those made on account of an outstanding debt, within one year of the bankruptcy for insider creditors (90 days for non-insider creditors), which allow the creditor to receive more than it would have in the debtor's bankruptcy had the transfer not been made. To the extent that you prefer a family member or friend, that payment may be avoided and recovered.

To some extent, the insider may be no worse off for having received the transfer. While they may ultimately be forced to return the payment, they would have at least had the use of the funds for some period of time. In addition, they may have defenses (particularly if the payment by you is consistent with your prior payment history) or they give you new value before the case is filed. There is, however, a scenario where you, as the debtor, are worse off. That is where you make the payment out of what would have been exempt assets.