1) What is a Bankruptcy Exemption?
2) Understand Bankruptcy Exemptions
In Chapter 7 bankruptcies, exemptions play an important role in helping protect your assets from liquidation. As we touched base on earlier, when you file for Chapter 7 bankruptcy, the court appoints a trustee to oversee everything you own. The trustee’s job is to sell off whatever they can to help pay your creditors before wiping out your debts. But don’t worry, that’s when exemptions come in to protect certain assets from being sold.
When you file for Chapter 7 bankruptcy, you’ll need to list everything you own. This list becomes your ‘estate’ that the trustee will manage. The trustee can sell or liquidate almost anything of value to pay off your creditors, but only if its value exceeds the exemption limits.
The following are some bankruptcy exemptions:
- Motor Vehicles (up to a certain dollar amount)
- Pensions
- Reasonably necessary clothing
- Reasonably necessary furniture
- Household appliances
- Pensions
- Jewelry (up to a certain dollar amount)
- Tools (used for work, trade, or up to a certain dollar amount)
- Damages awarded for personal injury
- Equity in the debtor’s home (up to a certain dollar amount)
- Unpaid but earned wages (up to a certain percentage)
- Public benefits received
Some exemptions are more detailed than others, especially when they cover only part of an asset’s value. For example, if your state allows a $5,000 exemption for a vehicle and your car is worth $5,000 or less, you may keep it. But if your car is worth $ 10,000, the trustee may sell it to pay off your creditors.
If you’d like to understand it from the perspective of someone who has gone through the Chapter 7 bankruptcy process, John from Ascend actually recently filed Chapter 7 bankruptcy, he had to go through listing all his assets to his trustee so he created a whole bankruptcy experience article series to provide an in depth view of his bankruptcy filing experience from research to the forgiveness of his debts.
How Much Cash Can You Keep in a Bankruptcy?
In bankruptcy, the amount of cash you can keep depends on various factors, including the type of bankruptcy you file and the exemptions available in your jurisdiction. Typically, when you file for bankruptcy, you’re required to disclose all your assets, including cash on hand.
In Chapter 7 bankruptcy, which involves liquidating assets to pay off creditors, the trustee may scrutinize your cash holdings to determine if they can be used to repay debts. However, certain exemptions may protect a portion of your cash from being seized. These exemptions vary by state but often include a homestead exemption, which protects a certain amount of equity in your primary residence, and exemptions for essential items like clothing, household goods, and tools of the trade. Some states also offer a wildcard exemption that can be applied to any asset, including cash.
In Chapter 13 bankruptcy, which involves creating a repayment plan to pay off debts over time, you get to keep your assets, including cash, but you must use your disposable income to make payments to creditors.
Overall, the specific amount of cash you can keep in bankruptcy varies depending on your individual circumstances and the laws of your state. It’s essential to consult with a bankruptcy attorney who can provide guidance based on your situation and help you maximize the protections available to you.
4) How Does Chapter 13 Bankruptcy Help Protect Non-Exempt Assets?
Chapter 13 Bankruptcy differs from Chapter 7 bankruptcy. Instead of trying to sell everything to pay off creditors if equity is above the exemption, with Chapter 13 bankruptcy, your goal is to pay off creditors over a longer period of time while keeping what you own.
This means that you may be able to keep your home or car regardless of the homestead exemption.
When you file for a Chapter 13 bankruptcy, one of the first and most important steps is determining what all you own, the amount of money you make, and how much you owe to creditors. Figuring out these things is what determines how much you will pay back to creditors each month.
5) Things Specifically NOT Exempt
While there are a lot of things covered under exemptions for both Chapter 7 and Chapter 13 bankruptcies, there are many other things that are specifically non-exempt. This can vary widely based on your location, what type of bankruptcy you are filing, and what your total assets are. Things like luxury items, second homes, and more may be non-exempt and can either be liquidated to pay off creditors or added to your disposable income total.
6) State and Federal Exemptions
When filing for bankruptcy, it is important to note that there are two sets of exemption laws. The state exemption is what your state offers as an exemption. These do not have to match your federal bankruptcy exemptions, which is the exemption offered nationally. There are some states where you can use federal bankruptcy exemptions and other states where you cannot.
Here are the states that allow you to use federal bankruptcy exemptions:
| Alaska | Arkansas | Connecticut |
| District of Columbia | Hawaii | Kentucky |
| Massachusetts | Michigan | Minnesota |
| New Hampshire | New Jersey | New Mexico |
| New York | Oregon | Pennsylvania |
| Rhode Island | Texas | Vermont |
| Washington | Wisconsin |
For instance, Texas may have an excellent homestead exemption, so if you are a Texan, it may be worth filing under the state exemption. Comparatively, New Jersey has pretty strict exemptions, which is why a lot of New Jersey residents may find themselves filing under federal exemptions. Make sure you work together with your legal representation to figure out which exemption works best for you!
How Does Bankruptcy Work
Bankruptcy is a legal process where a judge and trustee manage your finances when you can no longer pay off your debt. Common reasons for declaring bankruptcy include unemployment, divorce, medical bills, and excessive credit card debt.
There are different types of bankruptcy, with Chapter 7 and Chapter 13 being the most common. In Chapter 7, the court liquidates your assets to pay off debt quickly, leaving you with much less debt. Chapter 13 allows you to keep your assets while restructuring your debt payments.
Many fear losing everything in bankruptcy, but that’s often a misconception. A bankruptcy trustee oversees the process, either selling assets to pay debts (Chapter 7) or creating a payment plan (Chapter 13). Thankfully, Exemption Laws help you keep some of your assets even when you file for bankruptcy.
Can You Keep Your Home or Vehicle Using Bankruptcy Exemptions?
Each state has various bankruptcy exemptions. As such, you can use the following bankruptcy exemptions calculator to estimate whether you are at risk of losing your belongings.
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