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If you are thinking about filing bankruptcy, you should have a good understanding of what protection you can get for your property. The bankruptcy process offers debtors overwhelmed by their debts a "fresh start." When a debtor's bankruptcy case is closed, however, they will still need basic possessions and assets to move forward. The Bankruptcy Code recognizes these basic needs and provides various property exemptions for debtors. If property is exempt, it won't be subject to a creditors' claims.
Usually, you will include a schedule or list of your exempt property when you file your bankruptcy petition. The schedule should include a description of the property, specify the law authorizing the exemption, and list the value of the exemption and the market value of the property. Market value doesn't factor in the exemption amount. This information allows parties in your case to evaluate your claim, such as creditor who might object to an exemption.
Creditors, or others interested in your case, can object to your exemptions within 30 days after the meeting of the creditors, which is also called a 341 meeting. This meeting is one of the first things to occur after you file. If someone objects, it's their burden to prove that you've improperly claimed the exemption.
What Kinds of Property Are Exempt, and How Much?
The type and amount of bankruptcy exemptions varies and is determined under state or federal law. Exemptions used to be based entirely on state law, so your exemptions depended on where you lived, your domicile. The Bankruptcy Code tried to achieve more uniformity in exemptions with a set of minimum exemptions, allowing debtors to choose between exemptions under federal or state law. States were allowed to opt out of this framework and require their citizens to claim exemptions based on state law. Thirty-four states exercised this opt-out or veto power. In these states, the treatment of exemptions looks much like it did before the Bankruptcy Code was enacted. Talk to a bankruptcy lawyer in your area to determine which set of exemptions is best for you.
What about the House and the Car?
The homestead exemption applies to property used as your residence. The federal homestead exemption is currently $21,625. State homestead exemptions vary widely. Before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") was passed, debtors would engage in bankruptcy planning to maximize this exemption. A debtor would move to a state with a generous homestead exemption and shield assets from creditors by buying an expensive home. Under BAPCPA, the State applicable to your exemption is the one that you have resided in for 730 days prior to filing, or if you have resided in more than one state in the past two years, the one that you spent the majority of time in 180 days prior to filing. Washington State limits your homestead exemption to $125,000. Exceptions apply, including the common situation where someone trades up to a more expensive home and transfers equity to the new purchase. The Homestead exemption is also limited if you've used it to delay, hinder or defraud a creditor.
If your equity isn't covered by the homestead exemption, it's possible in a Chapter 7 case that the trustee, who administers your bankruptcy estate, could sell it to raise money to pay your creditors. In that case, you would want to consider filing under Chapter 13, which centers on a repayment plan spanning several years. If you don't have equity in the home, or it's within the exemption amount, you can consider keeping it. You'll still have to pay your mortgage. If you don't, the lender can seek foreclosure.
Exemptions for Automobiles
The Federal Bankruptcy Code 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 can apply the exemption amounts from other categories, such as the exemption for tools of the trade. If the trustee sells it, you're entitled to receive the exemption amount. It's possible to pay the trustee the amount above the exemption and keep the vehicle. It is also possible, under Chapter 13, to "cram down" the interest rate or principal on a loan for a car that you purchased over 910 prior to the filing.
Household Goods and Furnishings
Federal bankruptcy law and state laws provide exemptions for household goods and furnishings. The federal exemption amount is $11,525, and $550 for a particular item. However, this type of property usually has little resale value, and the bankruptcy trustee won't likely view it as a viable source of assets to use to repay creditors.
You can exempt retirement funds under ? 522(d)(12) of the Bankruptcy Code. The exemption applies to pension, profit sharing and stock bonus plans, employee annuities, Individual Retirement Accounts (IRAs), deferred compensation plans such as your 401(k) account, and certain trusts. The 2005 amendments to the Bankruptcy Code 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 held in Roth IRAs, but the cap doesn't impact most debtors.
Questions for Your Attorney
o Can I claim separate exemptions for my personal automobile and a van I use in my side remodeling business, and will the bankruptcy trustee and my creditors challenge these exemptions?
o I have a lot of equity in my house, but I hold title jointly with my spouse, who supplied the bulk of the down payment and most of the monthly mortgage payments. In a Chapter 7 bankruptcy can the trustee seek to have our home sold?
o Can you help me review my possible exemptions and eligibility for Chapter 7 bankruptcy? Is Chapter 13 bankruptcy a better choice for me?