Individuals who are considering filing bankruptcy are often hesitant because they believe if they file bankruptcy, their property will be taken away. This isn’t true. Many individuals can file bankruptcy and keep most of their property. Bankruptcy exemptions allow individuals to file bankruptcy and keep their property.
Bankruptcy Exemptions in Chapter 7
Individuals who file a Chapter 7 bankruptcy often have very little assets. Thus, most individuals who file Chapter 7 bankruptcy exempt their property and eliminate their debt. The Bankruptcy Court enacted bankruptcy laws to help individuals start over. The Bankruptcy Court understands that if they took away everything an individual owned, it would be nearly impossible for them to start over.
When an individual files Chapter 7 bankruptcy, a trustee is appointed to their case. The trustee represents the debtor’s creditors. Any property that does not fall under an exemption is deemed property of the Bankruptcy estate. Thus, the Trustee has the right to take any nonexempt property to pay off a debtor’s creditors. To determine what property a debtor is allowed to keep will depend on the value of the debtor’s assets and the exemptions available.
The Bankruptcy Estate
When an individual files bankruptcy their property becomes the property of the bankruptcy estate. Any property that is part of the bankruptcy estate and is not exempt can be used to pay off creditors. Property that is part of the bankruptcy estate includes:
• Property in the debtor’s possession at the time of filing
• Property held in someone else’s name
• Property the debtor recently gave away
• Marital property
• Future property interests
• Assets after filing the bankruptcy (within 180 days)
Bankruptcy exemptions are different state by state. The amount of property that an individual can exempt will depend upon the state they live in. The law requires that individuals file their bankruptcy petition in the state they are domiciled. Individuals only have one domicile which would be considered their primary residence.
There are two kinds of exemptions that individuals may be able to use: Federal or State exemptions. Each state has its own rules regarding which set of exemptions an individual must use. To use a State exemption the individual must have continuously domiciled in that state for 730 days before filing the bankruptcy petition. Individuals who have not lived in any state for 730 days before filing bankruptcy, will choose the State’s exemption they lived in for the previous 180 days before filing.
When Congress enacted the bankruptcy code, they set out a set of exemptions and allowed states to choose whether they wanted to opt-out of them in favor of their state law. Eighteen states allow individuals who want to file bankruptcy to choose between using the federal and state exemptions. While the other 34 states require individuals, who wish to file bankruptcy to use the state exemption only.
Currently, the Federal bankruptcy exemptions only apply if you live in one of the following states:
• New Hampshire
• New Jersey
• New Mexico
• New York
• Rhode Island
The Federal and State exemptions allow individuals to keep property with a certain amount of equity. Depending on the exemption, individuals can keep their house, cars, and assets with equity. Equity is the value of an asset minus what is owed. For example, if the bankruptcy car exemption in the state the debtor lives in is $2,500 and they have a car worth $2,000. They can exempt the equity ($500) and keep the car.
How Do Bankruptcy Exemptions Work?
Individuals that file bankruptcy must complete a bankruptcy petition. The bankruptcy petition asks individuals to list all of their debts and assets. Within the bankruptcy petition, individuals must list all of the property they own and the value of each item. They then must find an exemption that matches with the property they want to exempt.
When a trustee abandons an asset, it means they don’t want the asset. Sometimes property that is not exempt has little resale value and the trustee chooses not to go after it. This is because liquidating the asset won’t be worth the time and effort to pay back creditors. This is usually the case when there is very little equity in an asset, and it may cost just as much or more to try and sell the property.
Some assets don’t need to fall under an exemption under federal law. Some of these assets include 401(k) plans, IRAs (up to 1 million), social security benefits, unemployment benefits, disability benefits, veterans’ benefits, and alimony and child support payments.
Common Chapter 7 Bankruptcy Exemptions
Below are some of the most common bankruptcy exemptions in Chapter 7 bankruptcy.
1. Homestead Exemption: A homestead exemption protects any equity in an individual’s home. Generally, individuals can only use the homestead exemption to protect their primary residence. Depending on how much equity is in their home, individuals who are allowed to choose between either the federal exemptions or state exemptions will need to see which set of exemptions is best to cover the equity in their home.
2. Wage Exemption: Under a Chapter 7 bankruptcy, any wages earned after a bankruptcy petition is filed is not considered part of the bankruptcy estate. However, wages earned before filing but received after the bankruptcy petition is filed is property of the bankruptcy estate.
3. Vehicle Exemption: Individuals who have automobiles don’t necessarily have to give up their cars when they file bankruptcy. The Bankruptcy Code protects vehicles up to a certain value.
4. Household Goods & Furnishings Exemption: The Bankruptcy Court understands that individuals need basic items to survive. Basic items deemed necessary are clothes, medical supplies, appliances, and furniture.
5. Wildcard Exemption: The wildcard exemption allows individuals to exempt property that isn’t covered by another exemption. For example, if a vehicle is worth $10,000 and the vehicle exemption is $3,000 there is $7,000 of non-exempt equity. The wildcard exemption is $13,900 and can be used to exempt the $7,000 of non-exempt equity in the car.
6. Tools of the Trade: The tools of the trade exemption allow a person to keep certain items in his or her trade. This generally covers books, uniforms, office furniture, machinery, etc.
7. Pensions & Retirement Accounts: Individuals who file bankruptcy may keep their retirement accounts. This is primarily a reason that bankruptcy should be considered before individuals wipe out their retirement accounts.
Objecting to Exemptions
Exemptions listed on the bankruptcy forms can be objected by the creditors or the trustee. Creditors and trustees may object to objections that are not used properly or may be unfair. The creditors or trustees have the opportunity to file an objection within 30 days of the creditor's meeting. If no objection is filed, individuals may keep their property.
Exemptions can be very tricky and using the wrong exemption can be very dangerous. Understanding how exemptions work is one of the most important aspects of ensuring a property is safeguarded during the bankruptcy process. Individuals who are not sure how to use exemptions should consider speaking with a bankruptcy lawyer to ensure their property is safe.