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How Can I Protect My Property During a Bankruptcy?

If you’re thinking about filing for bankruptcy, you might wonder if you’ll lose essential things like your house or car during the process. This concern is reasonable because bankruptcy trustees, the people who oversee bankruptcies, can sell a debtor’s property in some instances.

However, bankruptcy law also contains “exemptions.” Exempt property cannot be sold. This article discusses the bankruptcy exemption system, the types of property that can be exempt, and more. Bankruptcy exemption laws can be complicated, so please speak to a local bankruptcy attorney to get the best advice for your situation.

Can My Property Be Sold During a Bankruptcy?

Maybe. It depends in part on the type of bankruptcy that you file.

Chapter 13 filings usually don’t involve property sales. Instead, the trustee helps you create a repayment plan that’s reasonable based on your assets. The risk of your property being taken in a Chapter 13 bankruptcy is low.

On the other hand, Chapter 7 bankruptcies are also called liquidation bankruptcies because they can require people to sell — or liquidate — their assets. The trustee uses the money from any sales to pay your outstanding debts.

What Are Bankruptcy Exemptions?

People who file bankruptcy still need basics such as food, clothes, and shelter. Making them buy everything all over again would create more debt and defeat the “fresh start” that bankruptcy can provide. So, the bankruptcy code lets people protect certain items and categories of property. These protections are called exemptions. If your property qualifies for an exemption, the trustee cannot sell it. However, trustees can still sell your non-exempt property.

What Exemptions Can I Claim in a Bankruptcy?

The answer to this question can be complicated. U.S. Bankruptcy Code contains a list of exemptions approved by Congress. However, Congress also allows states to create their own exemptions. So, protecting your property during bankruptcy depends on what your state’s laws say about bankruptcy exemptions.

As if this weren’t complicated enough, some states require bankruptcy filers to use their state’s bankruptcy exemptions and only those exemptions. But other states allow debtors to choose between federal bankruptcy exemptions and their state’s exemptions. Because one set of exemptions might be more generous than the other, this choice can be crucial to protecting your property.

Must use state exemptionsMay choose between state or federal exemptions (“Debtor’s Choice”)
ColoradoDistrict of Columbia
IndianaNew Hampshire
IowaNew Jersey
KansasNew Mexico
LouisianaNew York
MississippiRhode Island
North Carolina
North Dakota
South Carolina
South Dakota
West Virginia

What Are Some Common Bankruptcy Exemptions?

Here are a few examples of federal bankruptcy exemptions for personal property and real estate. Remember, exemptions, exemption limits, and exemption amounts may differ under state bankruptcy exemptions. Your lawyer can keep you informed about your state’s specific laws.

  • Your home: Keeping your home during bankruptcy is a high priority. The bankruptcy code’s homestead exemption protects up to $27,900 of the equity in your primary residence. “Equity” refers to the difference between your home’s current value and the amount remaining on your mortgage. For example, if your home is assessed at $200,000 and you still owe $175,000, you have $25,000 worth of equity. Under the federal exemption, you can keep your home because the amount of equity is less than $27,900. However, equity greater than $27,900 could make your home a non-exempt asset.
  • Your car: The motor vehicle exemption lets you protect up to $4,450 worth of equity in your car. To calculate the equity in your car, subtract what you’ve paid on the loan from the car’s current market value. So, if your car is worth $10,000 and you have $6,000 left on the loan, you have $4,000 in equity. Under the federal bankruptcy code, the car would be exempt.
  • Your household items: The household goods exemption helps debtors protect up to $14,875 worth of household items such as clothing, books, furniture, and appliances. However, no one item can be worth more than $700.
  • Things you use for work: The “tools of the trade” exemption protects anything that you regularly use for work. You can claim an exemption of up to $2,800 for these items.
  • The “wildcard” exemption: The wildcard exemption lets you protect $1,475 of any property you choose. Even better, if you didn’t use the homestead exemption or didn’t use it completely, federal law lets you use up to $13,950 of what’s left from that exemption to protect anything you like. For example, if you have $15,000 of equity in your car, it falls outside the motor vehicle exemption. But if you didn’t claim the homestead exemption, you can add the $4,450 motor vehicle exemption to the $13,950 wildcard to protect your car.

Note: Federal law and most states allow married couples filing bankruptcy together to combine their exemptions, doubling most families’ exemption limit.

Bankruptcy exemptions protect many other important items such as public benefits like Social Security benefits, public assistance, unemployment benefits, and veterans benefits. Also safe are health aids, retirement accounts (both IRAs and 401(k)s), life insurance policies, alimony, child support, and even jewelry and musical instruments. An experienced bankruptcy lawyer can help you find the exemptions that work best for your case.

How Do Exemptions Help During a Chapter 13 Bankruptcy?

Though exemptions are most often discussed in connection with Chapter 7 bankruptcy filings, they also serve a key function in Chapter 13 bankruptcy cases.

Before creating a repayment plan under Chapter 13, the trustee will look at your ability to pay. But when calculating your worth, the trustee must exclude your exempt property. So, your repayment plan will be based solely on your non-exempt property, which can make a huge difference in how much you’ll have to pay.

What To Do if You Have Questions About Bankruptcy Exemptions

From which exemptions to claim to how to claim them, bankruptcy exemptions raise many questions. Finding the right answers to these questions can determine whether you’ll lose property in Chapter 7 or face staggering payments under Chapter 13. A qualified bankruptcy attorney can help you protect your property in either type of bankruptcy. Before making any decisions, talk to a bankruptcy lawyer near you first.

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