Chapter 7 Bankruptcy: What Can You Keep?

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If you're considering filing for bankruptcy, you might have images of repo-men coming into your home and seizing your possessions, selling them to the bank and leaving you empty-handed.

While this may be the way bankruptcy looks in cartoons, in reality, the government created laws that help protect your property during bankruptcy. These protections take the form of Chapter 7 bankruptcy exemptions.

In this article:

  • What Are Chapter 7 Bankruptcy Exemptions?

  • What's The Difference Between State And Federal Chapter 7 Bankruptcy Exemptions?

  • The Most Common Chapter 7 Exemptions

  • What About Non-Exempt Property?

What Are Chapter 7 Bankruptcy Exemptions?

The purpose of bankruptcy is to help people get back on their feet and regain control of their financial situation. In order to help with this process, the government created a set of exemptions to help individuals maintain their quality of life, while still resolving their issues with creditors.

Chapter 7 bankruptcy exemptions protect the day-to-day property that will be excluded from your bankruptcy filing.

If your property is “exempt” from your Chapter 7 bankruptcy filing, it means that you get to keep that property. If a property is not exempt, then it means that your bankruptcy trustee can sell it and divide the profit among your creditors.

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How Do Bankruptcy Exemptions Work?

Each of the Chapter 7 bankruptcy exemptions has its own limit. This means that you’re allowed to protect certain types of property up to a certain amount.

For example, say your car is worth $3,500, and the exemption for vehicles in your area is up to $6,000. In this case, you would be allowed to keep your vehicle.

Say, however, that your vehicle was worth $9,000. In this situation, your trustee could choose to sell your vehicle for $9,000. They would then give you $6,000 of the profits, and divide the remaining $3,000 amongst your creditors.

Figuring out what is exempt and what is not will depend on the federal bankruptcy exemptions or the bankruptcy exemptions for your state.

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What's The Difference Between State And Federal Chapter 7 Bankruptcy Exemptions?

What you can exempt, and what your exemption limits are, is determined by the state you live in -- or have recently lived in. There are federal bankruptcy exemptions and state bankruptcy exemptions.

While the majority of states require you to use their Chapter 7 bankruptcy exemptions, sixteen states allow you to choose between the federal exemptions and your state's exemptions. If you happen to live in one of the states that allow you to choose between the two sets of exemptions, it's important to know that you can’t choose some exemptions from one set, and some from another. You have to pick one complete set or the other.

Qualifying for State Exemptions

The state you file for bankruptcy in is usually determined by the state you have lived in for the past two years.

If you haven't lived in any state for at least two years, however, your place of “residence” will likely be the place where you spent the majority of your time for the six months leading up to two years ago.

Here’s an example: Say you have been living in Arkansas for the past year and a half. Before living in Arkansas, you lived exclusively in Texas for 4 years. Because you haven't been living in Arkansas for the required two years, you will be counted as a Texas resident.

This means that you will choose between Texas' Chapter 7 bankruptcy exemptions or the federal bankruptcy exemptions.

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The Most Common Chapter 7 Exemptions

Even though every state will handle Chapter 7 bankruptcy exemptions a little differently, there are some common types of property that are usually protected. For example, your car, home, and clothes are usually exempt. However, collectibles, investments, and vacation homes are less likely to be exempt.

Again, the Chapter 7 bankruptcy exemptions will vary by state and federal laws, so the following is only a rough guideline. For more specific information, research the laws in your area or consult with a bankruptcy attorney.

Real Property (aka your house!)

Depending on how much equity you have in the home, your primary residence could be exempt from your Chapter 7 bankruptcy filing. However, this does not include things like second homes and vacation homes. That said, you have to meet a set of requirements that will determine if you are able to keep your home.

  • Up-to-date on payments. If you are current on your house payments, and your home's value is within the exemption limit of your state, then you're most likely clear to keep your home.

    If you aren't current with your mortgage payments, then your home is unlikely to qualify as an exemption.

  • The amount of equity in your home

    If your home's equity is below the exemption limit or it lacks equity all together, you can likely keep it. However, if you home’s equity is above the exemption limit, then it could be sold at your trustee's judgment.

    In the event that your home is sold, you will be repaid the exemption limit afterward.

Vehicles

The requirements for keep your car are similar to the requirements for keep your house. If you own your car outright and the value is within the exemption limit, you can likely keep your car. However, if you are still paying off your car, there are a few things to consider.

Keeping Your Car: Assuming Your Car Lease

If you lease your car, your options will be pretty similar. After you file for bankruptcy, you will be required to submit a statement of intentions. This statement gives you a chance to keep any of your debts that you would like to keep making payments on. If your car is on a lease and you want to keep making payments on it, you can assume the lease. “Assuming” your lease is just the legal way of saying that you plan on keeping the car and continuing your payments.

Reaffirmation

Sometimes, instead of repossessing your car, your car loan lender will offer to reaffirm your loan. This means that, despite having the debt discharged, you will continue to pay the remainder of your loan balance. This way you can keep your car and your lender doesn't lose any money.

Keep in mind that reaffirming your debt means you will still be held responsible if you miss any payments on the loan. So, consider your options carefully and only reaffirm your debt if you believe that you will be able to continue making payments on it.

Redemption

Depending on what your financial situation is at the time of filing, you may decide to choose a 722 redemption for your vehicle. Redemption is a way of reducing the amount of money you owe on your car loan if its market value has dropped since you first took out the loan.

For example, if you originally took out a $10,000 loan to pay for your vehicle, but it is now only worth $7,000, a redemption will bring your loan amount down to $7,000. The catch is that you must pay that $7,000 in one lump sum.

Giving Up Your Car: Surrender

If you don’t want to keep your vehicle, you can indicate this on your statement of intent.

Surrender

There are some circumstances where you may choose not to try to keep your vehicle. In these situations, you can choose to surrender the vehicle to the court. This means that you would give up ownership of your car and, instead, let the court to sell it and divide the profits among your creditors.

Personal Items and Household Goods

Aside from big items, like your home and your vehicle, a good portion of your everyday belonging are also exempt from Chapter 7 bankruptcy. This is because their value is too low to make it worth the trouble of reselling.

The rules, however, will vary depending on your state. But, for the most part, your clothes, furniture, and appliances should be safe to keep.

However, this might not apply to more expensive items. For example, things like designer clothes, expensive jewelry or handbags, and ornate furniture might be evaluated by your trustee. You may still have an exemption that protects these items, but it’s important to know that they’re not always protected.

Wages, Benefits, and Retirement Accounts

Wages that you earned prior to or during the filing process could be seized by the court, but only if your trustee believes that you do not need them for living expenses. Any post-bankruptcy earnings are completely exempt in a Chapter 7 filing.

Welfare benefits and retirement accounts are almost unanimously protected-- but only if you list them as exempt on your paperwork. Social Security, unemployment benefits, 401(k), disability benefits, veteran benefits, etc., are all protected by federal law.

However, if you have a lot of money saved in any of these accounts, it might be wise to talk to an attorney.

Wildcard Exemptions

Federal law, and some state laws, allow individuals filing for Chapter 7 bankruptcy a certain amount of wildcard exemptions. Wildcard exemptions are, as the name suggests, exemptions that you can tailor to your need. This often includes:

Unique property

The purpose of a wildcard exemption is to protect something that is important to you but doesn’t necessarily fit into one of the existing categories. You can use it to protect unique valuables like family heirlooms, wedding dresses, collectibles, or artwork.

Spillover from another exemption

A wildcard exemption can also be added to the exemption limit of another category. Say your vehicle's equity is just over the exemption limit in your area. In this case, you could add your wildcard exemption limit to protect the value of your car that is over the vehicle exemption limit.

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How To Claim Your Exemptions

To claim your Chapter 7 bankruptcy exemptions, you must list them under your Schedule C: The Property You Claim As Exempt.

It’s important to list all the property that you want to protect on your Schedule C. Anything that you do not claim as exempt, regardless of if it’s eligible for protection or not, will not be counted as exempt. This means that even if your property falls within your exemption limit but you do not claim it, your bankruptcy trustee is still allowed to sell it.

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What About Non-Exempt Property?

Non-exempt property will be anything that the law doesn’t protect. As we mentioned above, second homes or vehicles, extravagant jewelry, family heirlooms, collectibles, antiques, artwork, recreational vehicles like boats, and other luxury items are generally non-exempt.

Fortunately, if your trustee allows it, you might be able to buy back most of your non-exempt items at a slightly discounted price. While you may not be able to recover everything, this - coupled with your wildcard exemption - should help you save the majority of your non-exempt property.

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Bankruptcy Exemptions Help Protect Most of Your Day-to-Day Property

Chapter 7 bankruptcy exemptions can be a tricky subject, with lots of very specific rules, requirements, and terms. However, they can also save you a lot of money and property during your bankruptcy process.

The more effort you invest in learning your exemption laws, the more you will be able to keep during your bankruptcy. Before you submit your filing, take the time to research your exemption rules or speak with your bankruptcy attorney thoroughly about what you want to keep most.

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