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Chapter 7 Bankruptcy Exemptions

U.S. bankruptcy law defines Chapter 7 bankruptcy as the process of selling off the assets that a debtor has and then using that money to pay off as much of the debt as possible, distributing it among the various creditors who are owed. This is known as liquidation, and it is an important distinction from other types of bankruptcy that allow for reorganization plans; after Chapter 7 bankruptcy has been carried out, the debt is settled, and nothing more is required of the debtor.

This is by no means a recent addition to the law, as the roots for it can be traced back to the Constitution of the United States. The state governments are cut out of the equation, and the federal government is in charge, whether businesses or individuals are filing. To make this work, the federal government then created a system of U.S. Bankruptcy Courts, which can be accessed in assigned districts of U.S. States.

One interesting thing to note about Chapter 7 bankruptcy in particular is that the law denotes that only property that is not exempt has to be sold off in this fashion. What determines if property is exempt?

A General Rule: Necessary Property

On the whole, the idea of bankruptcy is not to punish someone for getting into debt, but to allow one to start over. If the court came in and took everything that one owned, this would not create a fresh start at all. Therefore, the general rule followed is that items that are considered to be necessary in modern life are typically exempt. This protects the personal property that a person needs, only forcing one to turn over assets that one can live without.

Many of the things that are typically exempt include:

  • Cars, trucks, and other vehicles
  • Clothing
  • Furnishings and other goods from the home
  • Jewelry
  • Appliances
  • Pensions
  • Equity in the home itself
  • Items that are considered to be necessary for work; this varies from one profession to the next
  • Some wages that have already been earned, but which have not yet been paid
  • Benefits, such as those from social security
  • And more

The thing to know here is that many of these categories come with limits, or they are subjected to oversight. For instance, necessary clothing can be kept, but frivolous clothing may have to be sold off. Vehicles, homes, and wages may be kept only in portion, or up to a specific value. For example, someone who is declaring for bankruptcy may not be allowed to keep a foreign sports car that is worth $500,000, but one may be able to keep a daily driver sedan that is worth $30,000.

There are also gray areas when it comes to deciding if an item is necessary, especially when those items relate to work. Does someone who writes for a living need multiple computers, or just one? Does someone who does construction need an entire garage full of tools, or are there company tools that can be used, and do the ones at the home just see use in the person's spare time? Every case is different, and these are some of the questions that a judge will need to answer. The framework is there, but each person's assets have to be considered individually.

Losing What You Expected to Keep

If you're looking through the above list of items and finding yourself surprised by some of the things that are not on the list, you're not alone. It is possible to lose things that you thought you would be allowed to keep. For example, family heirlooms are not exempt, and neither are collections. Items like musical instruments, if not used for work, can be liquidated. Additional homes and vehicles, likewise, are not exempt.

Before starting the Chapter 7 bankruptcy process, it is very important to know what you can keep and what you cannot.

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