Property Exemptions in Bankruptcy

Cathy Moran

What Can I Keep If I File Bankruptcy?

The bankruptcy code allows each person who files bankruptcy to keep basic assets considered necessary for the debtor's "fresh start" after bankruptcy. That property is the debtor's "exempt property." The bankruptcy trustee, whose job it is to sell any substantial non-exempt property and distribute the proceeds to creditors, will not take it.

You'll claim property as exempt in the schedules (lists of assets and liabilities) that are filed to initiate the case. If no objections are filed to the exemptions, they become final 30 days after the meeting of creditors.

How Much Can I Exempt?

Exemptions are the one place where bankruptcy law varies from state to state. Congress created a set of exemptions in the bankruptcy code, but allowed each state to opt-out of those exemptions in favor of state exemptions.

Sixteen states allow debtors to elect the bankruptcy code exemptions. In those states, debtors get their choice between the federal exemptions and those in the law of their state. For the balance of the states, only the state exemptions can be selected. You need to consult state law or a local lawyer for the list of exemptions available to you.

Can I Keep My House?

If there is no equity in the house (today's value less costs of sale less payoff balances on all liens and mortgages), the trustee in a Chapter 7 bankruptcy will abandon the house to you. That is, you keep it, as long as you pay the mortgages.

A bankruptcy doesn't wipe out voluntary liens, like mortgages and deeds of trust, or tax liens. So the lender still has the right to foreclose if you don't pay. If you pay, everyone is happy. Remember, the lender doesn't want the property; it wants you to pay regularly on the loan. Foreclosure is a last resort for the lender if it concludes it can't get the owed money any other way.

If there's equity, you'll need to figure out whether any "homestead exemption" available to you is equal to or greater than the equity in the property. If the equity is all exempt, you can keep the house, as long as you pay the mortgages. If there's more equity than the allowed exemption, it's possible you could lose the home. In that case, you may wish to consider a Chapter 13 bankruptcy.

The amount of the homestead exemption can vary dramatically from state to state:

• Florida, Texas, and Oklahoma provide homestead protection in their state constitutions. Some states find homesteads to be so important that they will protect homesteads of any value, even if they are worth more than a million dollars.
• Other states, including Maryland, New Jersey, Pennsylvania and Rhode Island, recognize no homestead at all.
• Still others have only nominal homestead exemptions. Some states vary their exemptions by marital status, number of occupants or dependents, age of debtors and location of homestead.

Can I Keep My Car?

What you must do to keep the car varies depending on whether there is non-exempt equity in the car. If there is no equity in the car, after subtracting any car loan and exemption from the car's present value, the bankruptcy trustee will not take the car.

If there's equity in the car over and above the amount of the exemption available, you can usually buy any unprotected equity from the Chapter 7 trustee.

If you still owe money on the car, you can choose to reaffirm the debt to the secured lender, keep the car, and continue paying under the existing terms. You can also "redeem" the car by buying it from the secured creditor in a single payment for its' present value. In some jurisdictions, you don't even have to reaffirm the debt; you can keep the car if you continue making payments.

If you choose, you can surrender the car and be free of any obligation to pay for it.

When Everything Is Exempt

Most Chapter 7 cases are considered "no-asset cases." The debtors give up nothing to the trustee for the following reasons:

• The exemption systems permit debtors to keep the means of day-to-day living, free from the claims of their creditors. The point of bankruptcy is to get a fresh start and that is only possible if the debtor has something to start with.
• Used household goods and personal effects have little resale value, and so do not represent a real source of value to repay creditors
• Pension rights and 401(k) plans, frequently the largest or second largest asset of most families, are not property of the bankruptcy estate. Since retirement plans are outside the estate, the debtor doesn't have to exempt them to keep them.
• IRAs and other retirement savings may be property of the estate, but are frequently exempt

How Do I Calculate What's Exempt?

The values in the exemption statutes refer to the present sale value of the item (not the purchase price or replacement value).

If an asset is subject to a mortgage or a lien, it's the value of the item after deducting the amount of the lien or liens (the equity) that is used to figure the exemption. Some liens can be avoided to create exempt equity.

The law looks only to the value of the debtor's share of the equity in an item if it is co-owned.

Significant Non-Exempt Assets

If you have significant non-exempt assets, talk to your bankruptcy lawyer about converting non-exempt value into exempt value. Courts differ on what constitutes good bankruptcy planning versus what is a scheme to "hinder, delay or defraud creditors," something which can jeopardize your discharge. Chapter 13 bankruptcy may also be an option.

The bottom line is that bankruptcy exemptions are a big deal and affect what what you get to keep and what you stand to lose by filing bankruptcy. Working with a seasoned bankruptcy lawyer is critical here.

Cathy Moran is a business and bankruptcy lawyer in the San Francisco Bay Area, and was one of the first bankruptcy specialists certified by the California State Bar. Her Web site Bankruptcy in Brief includes much information on bankruptcy.

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