Most people who file for Chapter 7 bankruptcy end up keeping all their property. But that’s by no mean a given. Before filing for bankruptcy, it’s very important to know which exemptions will apply to your property and whether they can protect your property.
One of the most common questions we get is: “Can I keep my property if I file for bankruptcy?” The answer is usually yes! 96% of Chapter 7 bankruptcy cases result in the filer keeping all their property. But protecting your property requires some knowledge. Read on for more details.
The Purpose of Bankruptcy Law - A Fresh Start
Bankruptcy was created because Congress believed that Americans who are in financial trouble often need a “fresh start” in the form of a bankruptcy discharge. Bankruptcy’s fresh start allows you to shed debt and to re-enter our economy with a brighter financial future. But the purpose of the fresh start would be defeated if you lost the clothes on your back, the roof over your head, and your transportation to work when you filed for bankruptcy. You would need to buy all those necessities again as soon as you exited bankruptcy and would probably have to incur more debt to do it.↑ Back to top
So to protect Americans’ ability to get a fresh start, our government has enacted “bankruptcy exemptions.” These laws allow you to keep a reasonable amount of possessions when you file for bankruptcy so you can move forward with your life without becoming a ward of the state that needs to receive public benefits to survive.
Exemptions usually include some amount of equity in your family home, personal property like a vehicle, furniture, clothing, kitchen items, tools used in your trade/profession, retirement accounts, some amount of current wages, child support, alimony, government benefits, and other items. But the amount of these items that you are able to protect varies by state.
Common exemption types are:
Homestead Exemption. This protects your equity in your primary residence that you own and occupy, usually up to a certain amount
Vehicle Exemption. This protects your equity in your car or other vehicle up to a certain amount.
Wildcard Exemption. This allows you to save property that is important to you and that you wouldn’t be able to protect otherwise, up to certain limits.↑ Back to top
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Which Exemptions Apply?
The key to knowing whether your property is protected is knowing which “exemption” laws apply.
State Bankruptcy Exemptions
Each state has its own set of bankruptcy exemptions for residents of that state to use. To learn more about your current state’s exemptions, visit the article on your state’s exemptions. But to use a state’s exemptions, you must have resided in that state for at least the past 2 years (730 days) before filing your bankruptcy case. If you haven’t lived in your current state for at least the past two years, you need to use the exemptions of the state where you resided the longest during the 6 month period (180 days) prior to 2-years before filing. For example, I moved to New York last year and for the three years before the move, I lived in Maine. If I file for bankruptcy today, I can’t use New York bankruptcy exemptions; I would have to use Maine bankruptcy exemptions.
Federal Bankruptcy Exemptions
Nineteen states allow you to choose between their state exemption system or a separate set of federal bankruptcy exemptions. If you have resided in one of these states for (1) at least the past two years before your bankruptcy filing, or (2) the majority of the 6 month period prior to two years before your bankruptcy filing, then you choose between using the federal bankruptcy exemptions or that state’s exemptions. This often raises the question - if the federal exemptions allow you to protect more for household goods, but the state exemptions allow you to protect more for vehicles, can you combine the best of both exemption systems? Unfortunately, no. You cannot mix and match from the two different exemptions systems.
The other states have opted out from the federal bankruptcy exemptions. You can find a full list of all opt-out states here.
Which are Better - State or Federal Exemptions?
In the 19 states that offer the federal exemptions, which are better to choose: the federal exemptions or the state ones? The answer depends on the state you reside in and on the type and value of the property you own.
If you own a home, the federal exemption scheme is often a poor choice because it only protects $23,675 of equity in your personal residence. And most of the states which offer the federal exemptions offer a homestead exemption that is significantly greater than $23,675. For example, New York’s homestead exemption is at least $82,775 and Connecticut’s homestead exemption is at least $75,000. So if you own and occupy your primary residence in one of those states, selecting the state exemptions would allow you to protect over $50,000 more in equity.
On the other hand, if you don’t own a home, the federal exemptions offer a wildcard that protects up to $13,100, which is significantly greater than the wildcard for most states. Thus, in many states like New York and Connecticut, filers who don’t own real estate but have other expensive property will often choose the federal exemptions.↑ Back to top
What Happens if My Property Is Not Exempt?
Sometimes, you will own property that exceeds your maximum exemption amount. This is called a non-exempt asset. For example, let’s say you own a $10,000 car and your state only gives you a $5,000 exemption for your vehicle with no wildcard. What happens then?
In principle, your trustee is entitled to seize and then resell your car. From the sale proceeds, the trustee would have to give you your $5,000 exemption amount first. Then, the trustee would take $5,000 for creditors. In reality, though, the trustee will have significant costs in seizing the car and then reselling it, so after all these costs are factored in the trustee will have less than $5,000. As a result, the trustee would usually prefer to cut a deal with you. Typically, the trustee would agree to let you keep your car for a cash payment that is less than $5,000 - perhaps $2,000 cash. The trustee will usually accept payments in installments from wages you earn after filing.
In addition, if the vehicle’s value is over the exemption limit by only a small amount - say $1,000 - the cost of seizing and selling the property would eat up any value to the trustee. So in these cases, the trustee will leave the property to you for free.
On the other hand, what if you have $10,000 in cash and your state only allows you to protect $5,000 in cash. In this case, there are no transfer costs to the trustee. The trustee would simply demand that you turn over the entire $5,000 surplus amount.↑ Back to top
Most people who file for Chapter 7 bankruptcy end up keeping all their property. But that’s by no mean a given. Before filing for bankruptcy, it’s very important to know which exemptions will apply to your property and whether they can protect your property. If
If you need to start and have questions about exemptions, we’re here to help! Head over to www.upsolve.org today to take your first steps towards a better financial future.↑ Back to top