A bankruptcy exemption allows you to keep certain property and gives you the right to part of the proceeds from other property that is sold by a trustee. This includes real property such as your home and personal property like furniture and a car.
State and federal exemption systems differ. The exemption system you use depends on where you lived for the last two years, known as domicile requirements.
What is a Bankruptcy Exemption?
A bankruptcy exemption is a legal right that lets a debtor protect property from the bankruptcy trustee who oversees a Chapter 7 case. If a debtor does not claim an exemption for certain property, the trustee can take and sell that property to pay creditors. Most states have their own set of exemptions, and some, such as California, allow debtors to choose between state and federal exemptions. Exemption dollar amounts are typically adjusted for inflation every three years.
Bankruptcy law is concerned with getting people out of crushing debt and back on their feet, so exemptions are designed to protect the type of property that people need to function in society. A homestead exemption, for example, would protect the equity in your home. There are also exemptions for motor vehicles and personal property. You claim the exemptions on a Schedule C form filed with the court as part of your bankruptcy case. Your bankruptcy exemptions attorney relies on your honesty to submit accurate values for the property you list as exempt.
What Assets Are Exempt from Bankruptcy?
Many states exempt motor vehicles, up to a certain dollar amount of equity (often based on Kelley Blue Book private party value), tools of the trade such as your computer and professional books, jewelry up to a specific dollar amount, health aids such as hearing or vision aids, and even some kinds of pet animals. Exemptions are meant to protect those items that are deemed necessary for living and working.
The trustee does not take these items from you, but rather sells them to pay a portion of your unsecured debts. If you have no unsecured debt, the trustee simply takes nothing from you in Chapter 7. Most of the time this is what happens because there are not enough state bankruptcy exemptions to cover everything a person owns. If you move to a state that does not allow its own bankruptcy exemptions, you can still use federal nonbankruptcy exemptions (see NCLC’s Consumer Bankruptcy Law and Practice SS 10.2.1.1). Alternatively, you can claim the exemptions of the state where you lived for two years immediately prior to filing your Chapter 7 bankruptcy.
What Assets Can I Keep in a Chapter 7 Bankruptcy?
Many people are under the misguided impression that filing for bankruptcy means they have to give up their possessions and assets. This is untrue, and it is possible to keep most possessions through the process if you have sufficient exemptions.
Each state has its own rules for exemptions, but most follow the same basic lines. You can exempt a certain amount of equity in your home, a motor vehicle, up to $4,450 in cash (including money in the bank), a set number of jewelry items and tools of the trade, and awards from divorce for alimony or child support.
There are capped amounts for each of these categories, and the values are adjusted every three years to reflect realistic amounts that debtors can reasonably protect. The assistance of an experienced White Plains bankruptcy attorney is essential when claiming exemptions. This professional can help you avoid making mistakes, such as purposefully underestimating asset values to try to keep something you would otherwise lose in the case.
What Assets Can I Keep in a Chapter 13 Bankruptcy?
Generally speaking, most property can be kept in Chapter 13 bankruptcy, as long as the trustee does not have reason to believe you’re trying to defraud or hinder creditors. For instance, converting nonexempt property into exempt property could rise to the level of fraud and you might be denied a discharge.
Bankruptcy exemptions are designed to protect the assets that people need to function as productive members of society. The trustee only sells assets that exceed your state’s exemption limits or your disposable income, which is determined by subtracting your expenses from your monthly income and multiplying them by the number of months in your repayment plan.
As a result, you’ll typically be able to keep your home and car. However, you may need to catch up on your payments in order to retain them. Secured debts like mortgage and car loans are paid over time in a repayment plan, as are any unpaid unsecured debts such as credit card balances.