Bankruptcy Exemptions

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Bankruptcy Exemptions

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From Executive Director

What are bankruptcy exemptions? Bankruptcy exemptions are properties that you can exempt from or keep out of bankruptcy. In other words, basically, the exemptions are the property that you can keep when you file bankruptcy.

First, exemptions depend on which type of bankruptcy that you file.

In Chapter 13 bankruptcy, there are not any exemptions because none are needed. People who file Chapter 13 bankruptcy generally keep all of their property except for property that is subject to a security interest (such as a house subject to a mortgage or a car subject to a car loan), and they even keep property subject to a security interest as long as they make their payments.

However, a Chapter 7 bankruptcy is different. In a Chapter 7 bankruptcy, the bankruptcy trustee’s job is to take whatever property that the debtor owns that is not exempt, sell it, and pay the net proceeds over to the debtor’s creditors.

So, what are Chapter 7 bankruptcy exemptions? That depends.

Bankruptcy is federal law and bankruptcy cases are filed in the federal district court for the area in which the debtor lives. Federal law list bankruptcy exemptions, but it also gives the states the opportunity to “opt out” of the federal bankruptcy exemptions and make their own exemptions. And most states have made their own exemptions.

Because the bankruptcy courts in some states apply the federal bankruptcy exemptions and bankruptcy courts in other states apply the state mandated exemptions, the property that you can keep when you file Chapter 7 bankruptcy varies state to state and depends on the state in which you live. You may have heard that a lot of famous wealthy people move to Florida and then file bankruptcy. That is because Florida exempts more property than other states.

Generally, Chapter 7 bankruptcy exempt property includes at least a portion of the following:

    - Household goods such as furniture, kitchen appliances and utensils, electronics, etc.

    - Personal items and property such as clothing, jewelry, etc.

    - Health aids.

    - Tools of a person's trade.

    - Automobiles and vehicles.

    - Homes used as the debtor's primary residence.

    - Pensions.

IMPORTANT: Notice that, depending on the value of specific property, the exemptions may exempt all of the property or may exempt only a portion of the property.

Chapter 7 bankruptcy exemptions usually state the type of property and a dollar amount that is exempted. The dollar amount that is exempted is the debtor’s “equity” in the property.

For example, a state’s law may say that a debtor’s home is exempted up to $10,000. That doesn’t mean that only homes valued at less than $10,000 are exempted. If it did, then no homes would be exempted. Rather it means that the debtor can exempt from bankruptcy $10,000 of the home’s value.

The way the Chapter 7 bankruptcy exemption would work in the example is that, if the debtor owned his/her own out right without a mortgage, the bankruptcy trustee would sell the home, pay $10,000 to the debtor and pay the net balance to the debtor’s creditors. If the debtor had a mortgage that was less than $10,000 less than the value of the home, the bankruptcy trustee would sell the home, pay the debtor the $10,000, pay off the mortgage, and then pay the net balance to the debtor’s creditors. If the debtor had a mortgage that was within $10,000 of the home’s value or even more than the home’s value, then the bankruptcy trustee would not sell the home because, after paying the debtor $10,000 and paying off the mortgage, there would not be any money to pay over to the debtor’s creditors.

When considering whether or not to sell property, bankruptcy trustees have to also consider the cost of selling the property. In the above example, if the $10,000 plus the mortgage are equal to the home’s value, the trustee would not sell the home because there would not be enough money from the sale to pay the debtor $10,000, pay off the mortgage, and pay the cost of selling the home.

Depending on the type of property to be exempted, sometimes, it is a matter of working with the bankruptcy trustee. You can’t really divide a house. You either sell all of the house or you do not sell it. However, tools of a person’s trade may be divided. For example, a state’s law may allow a debtor to exempt $1,000 of the debtor’s tools of trade and the debtor may have $7,500 in tools. Instead of taking all of the debtor’s tools, selling them, paying the debtor $1,000, and then paying the net balance to the debtor’s creditors, a bankruptcy trustee may allow the debtor to keep $1,000's worth of tools and then take and sell the rest of the tools.

Finally, when considering Chapter 7 bankruptcy exemptions, consider the value of the property. You may have paid a $1,000 for certain furniture 10 years ago. That doesn’t necessarily mean it is worth $1,000 now. If it is well worn and used, you may be able to get only $50 for it now. On the other hand, if it is collectable furniture that has been well taken care of, it may now be worth much more than $1,000.

As stated above, a specific list of Chapter 7 bankruptcy exemptions that are applicable to you depends on the state in which you live. To determine exactly what property you may exempt, you need to look at your state's laws. Information that you find on the internet may or may not be accurate. The best way to learn what property is exempt in your state is to contact a bankruptcy lawyer.

This is general information only. If you have any questions whatsoever, talk with a lawyer licensed in your state who has experience with Chapter 7 bankruptcy, Chapter 13 bankruptcy, or bankruptcy in general.

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