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Why is bankruptcy federal law?

Anyone familiar with the American system of law will be familiar with the two-tier arrangement of federal and state laws. In some areas the federal government has determined it necessary to “pre-empt the field” when it comes to a given law, meaning that federal law is to govern instead of state laws. The U.S. Bankruptcy Code is one such law.

The main purpose of making bankruptcy a federal law instead of allowing each state to enact and maintain its own bankruptcy laws is for uniformity in how the law works. Especially given the ability of companies and individuals to travel and to carry out transactions in a number of different states, discrepancies between states might contribute to “forum shopping” among states looking for the most advantageous treatment.

This is not to say, however, that states can have no laws that relate to bankruptcy. On the contrary, bankruptcy law allows for state laws in some areas to be included for purposes of petitions in bankruptcy. One of the most common of these areas of state law inclusion is property exemptions.

In Ohio, for example, there are state law provisions for cash on hand, household goods, and homestead exemptions that can take precedence over the exemptions set forth in the federal bankruptcy code. Often it can be more advantageous to use state law exemptions instead of the more generic federal ones.

The decision of whether to take advantage of state law exemptions is subordinate to the overall decision of whether to make use of bankruptcy itself. Questions with regard to both of these, and other decisions can be best addressed with the assistance of a law firm that practices in bankruptcy law and which is experienced with the application of Ohio state laws within the overall context of the federal bankruptcy code.

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