Bankruptcy offers you a fresh start if you're overwhelmed by debt. Most of your debts are discharged or wiped out, or you pay them off over time according to a schedule and budget. Freedom from your debts isn't free, though. Some of your property may be taken or sold to pay some of your creditors.
But you don't lose everything. After the bankruptcy, you'll still need basic possessions and assets to move forward. The Bankruptcy Code recognizes these basic needs and gives you property exemptions. If property is exempt, it can't be used to pay your creditors' claims.
You include a schedule or list of your exempt property when you file your bankruptcy petition. The schedule should include:
- A description of each item you're claiming as exempt
- The specific law that allows each exemption
- The fair market value of each item you're claiming as exempt
The schedule allows the bankruptcy court, trustee and your creditors evaluate your case. Your creditors or trustee can object to your exemptions within 30 days after the meeting of the creditors (called a 341 meeting). This meeting takes place very soon after your case is filed.
If someone objects, it's his or her burden to prove the property isn't exempt or it wasn't claimed properly in your schedule. If no one objects, the property listed in your schedule is excluded from your bankruptcy estate - it can't be used to pay your creditors.
What and How Much Is Exempt?
The type and amount of bankruptcy exemptions are set by the federal bankruptcy code or the laws in your state. At one time, exemptions were based entirely on state law, so your exemptions depended on where you lived. The federal law tried to make things uniform. However, states were allowed to opt out of federal exemption scheme and require their citizens to use state law exemptions.
So, you might have a choice on whether to use the federal or your state's exemptions. Many states don't allow you to use the federal exemptions. Talk with a lawyer in your area about the bankruptcy exemptions available to you.
What about the House and the Car?
The homestead exemption applies to property used as your residence. As of 2011, the federal homestead exemption is $21,165. State homestead exemptions vary a great deal. In some states, like Florida, there's no limit, while in other states, like New York, the limit is $50,000 to $150, 000, depending on where you live.
Before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Act) was passed, it was common for homeowners to move to a state with a generous homestead exemption and shield assets from creditors by buying an expensive home. The Act tries to stop this practice by limiting any homestead exemption to $146,450 if you bought the home within 1215 days before filing for bankruptcy.
If your home equity isn't covered by the homestead exemption, it's possible in a Chapter 7 case that the trustee could have it sold to raise money to pay your creditors. You may want to consider filing under Chapter 13, where you pay back most of your debts, including your mortgage, over a period years according to a court-approved payment plan.
If you don't have equity in the home, or it's within the exemption amount, you can keep the home. You'll still have to pay your mortgage, though. If you don't, the lender can seek foreclosure.
Exemptions for Automobiles
For 2011, the federal exemption for a car or automobile is $3,450. The equity in your car is based on the car's market value, less any loans against it. If your equity is more than $3,450, it's possible that you could apply exemption amounts from other categories, such as the exemption for tools of the trade. If the trustee decides to sell it, you'll be paid $3,450.
You may have the option, though, to pay the trustee the amount above the exemption and keep the vehicle.
Other Notable Exemptions
Household Goods and Furnishings
Federal and state bankruptcy laws allow exemptions for household goods and furnishings. The 2011 federal exemption is $11,525. No one item can be worth more than $550, however. As a practical matter, this type of property usually has little resale value, so a trustee usually won't bother with selling it to repay your creditors.
Retirement funds are exempt, too. The federal exemption (and most states) applies to pension, profit sharing and stock bonus plans, Individual Retirement Accounts (IRAs), deferred compensation plans such as your 401(k) account and other funds.
The 2005 Act expanded the protection allowed to certain tax-exempt retirement plans that weren't always protected under former law. This protection is important, as your retirement account balances are probably among the most substantial assets you have.
There's a cap on the amount of exempt funds in held in IRAs of $1,171,650. The sheer size of the cap means most people who file for bankruptcy don't have to worry about it.
Exemptions are very important. Knowing what may or may not be exempt may make you change your mind about filing for bankruptcy, and will certainly impact your lifestyle after the bankruptcy is over. Be sure to discuss your exemptions in detail with your attorney.
Questions for Your Attorney
- Can I claim separate exemptions for my personal automobile and a van I use in my side remodeling business? Will anyone object?
- I have a lot of equity in my house, but I hold title jointly with my spouse. How does joint ownership affect my homestead exemption and trustee sale issues in a Chapter 7 case?
- Can you help me review my possible exemptions and eligibility for Chapter 7 bankruptcy? Is Chapter 13 bankruptcy a better choice for me?