What are bankruptcy exemptions?

Jonathan Petts

Jonathan Petts - Executive Director
December 3, 2018

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Filing for bankruptcy relief does not mean that you are left destitute. The purpose of filing a bankruptcy case is to obtain a fresh start. It is impossible to recover and rebuild after a financial crisis if you do not have the basic necessities to move forward with your life. How does the bankruptcy court ensure that debtors retain enough property to support the debtor and the debtor’s dependents?

What Are Bankruptcy Exemptions?

Bankruptcy exemptions protect the equity in certain property. Property that is exempt cannot be used to pay debts. Therefore, a debtor is permitted to keep all exempt property. In a Chapter 7 case, the Chapter 7 trustee does not consider property that is protected by bankruptcy exemptions as property he can sell to pay unsecured creditors.

However, the debtor must claim the bankruptcy exemptions to protect their property. If a debtor fails to claim the bankruptcy exemptions or claims the incorrect bankruptcy exemptions, the debtor’s property is not protected from the Chapter 7 trustee.

If you want to determine if your property is exempt in a Chapter 7 bankruptcy case, Upsolve can help. Upsolve is a non-profit organization that assists low-income individuals who cannot afford to pay an attorney file for debt relief under Chapter 7.

Click here to begin Upsolve's free bankruptcy procedure to explore bankruptcy exemptions and debt relief options so that you can be on your way to a debt-free life.

Who Can Claim Bankruptcy Exemptions?

Individuals can claim property as exempt. Business entities are not entitled to claim property exempt. When a business files under Chapter 7 of the Bankruptcy Code, the business closes. The business property is either returned to secured creditors or sold to pay unsecured creditors.

However, individuals keep exempt property when they file a Chapter 7 case. The property is not used to pay debts.

How Does a Debtor Claim Bankruptcy Exemptions?

On Schedule C of the bankruptcy schedules, the debtor must list all bankruptcy exemptions being claimed. The exemptions are matched with the property that they protect.

For example, if the debtor owns a home, the debtor may claim a homestead exemption to protect a certain amount of the equity in the home from the Chapter 7 trustee and the unsecured creditors. If the homestead exemption covers all equity in the home, the home is considered an exempt asset.

What is an Exempt Asset?

An exempt asset is property that does not have any equity that is not covered by bankruptcy exemptions. Equity is the value of the property that is not encumbered by a secured loan.

For example, if your home is worth $100,000 and you have a home mortgage in the amount of $80,000, your net equity in your home is $20,000. If you live in a state that uses federal bankruptcy exemptions, the entire $20,000 in equity in your home should be protected by the federal homestead exemption.

Do I Still Owe My Mortgage?

In the above example, the equity in your home would be protected by the federal homestead exemption. Therefore, your home would not be sold by the Chapter 7 trustee to pay unsecured debts. However, the bankruptcy exemption does not eliminate your mortgage debt.

If you owe a secured creditor money on a loan, you must continue to pay the loan payments to keep the property. In other words, you must continue to pay your mortgage payments to keep your home. If you fall behind in making the payments to your mortgage lender, the mortgage lender can begin foreclosure proceedings.

During a Chapter 7 bankruptcy case, the automatic stay provisions of Section 341 of the Bankruptcy Code prevent a creditor from taking any actions to collect a debt without court approval.

However, if you are behind in making your mortgage payments, the mortgage lender may file a motion to modify the stay. The court may grant the motion to allow the mortgage lender to proceed with a foreclosure lawsuit. The mortgage lender may also wait until the bankruptcy case is closed to proceed with a foreclosure lawsuit. Therefore, bankruptcy exemptions protect the equity in a property, but they do not relieve your legal liability to repay a secured debt.

Federal Bankruptcy Exemptions vs. State Bankruptcy Exemptions

The Bankruptcy Code is federal law. Therefore, bankruptcy laws apply to cases filed throughout the United States. However, the Bankruptcy Code has a provision that allows states to elect to enact their own bankruptcy exemptions. Therefore, a state can pass laws that require debtors who file in that state to use the state exemptions.

Some states have elected to use their own bankruptcy exemptions, but some states allow debtors to choose between federal and state bankruptcy exemptions.

Can I Use State Bankruptcy Exemptions?

You would need to review the laws in your state to determine if you must use state exemptions or you are allowed to choose between state and federal exemptions. In some cases, you might benefit from choosing one type of exemptions over the other type of exemptions.

A careful analysis of the various bankruptcy exemptions in your state will help determine which option will protect more of the equity in your property.

What Type of Property Is Protected By Bankruptcy Exemptions?

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Most states have similar bankruptcy exemptions. However, the value of the exemptions varies greatly. For instance, Texas bankruptcy exemptions allow debtors to exempt an unlimited amount of equity in their homes if they meet the qualifications for the exemption. However, many states limit the amount of equity a debtor may exempt in a home.

Examples of property that is typically exempt under federal and state bankruptcy exemptions include: • Homesteads • Personal Property • Jewelry • Motor Vehicle • Health Aids • Tools of the Trade (property used in a business or employment) • Life Insurance • Public Benefits (including food stamps, Social Security, veteran’s benefits, workers’ compensation, etc.) • Alimony and Child Support Payments • Personal Injury Awards • Education Savings Accounts • Most Retirement and Pension Accounts

The above list is not an exhaustive list of bankruptcy exemptions. Debtors must review the available exemptions to determine the best way to protect their property in a Chapter 7 bankruptcy case.

Furthermore, the federal bankruptcy exemptions and many state bankruptcy exemptions include a wildcard exemption. The wildcard exemption may apply to any property owned by the debtor. The rules regarding wildcard exemptions vary by state.

Do Bankruptcy Exemptions Change?

Yes, bankruptcy exemptions can be adjusted periodically to reflect changes in inflation. Debtors must ensure they are using the most current list of bankruptcy exemptions when they file their Chapter 7 bankruptcy case.

Upsolve’s bankruptcy software has the most current bankruptcy exemptions to help clients ensure they use the correct exemptions when completing their bankruptcy forms.

How Do I Know If I Can Use a Specific State’s Bankruptcy Exemptions?

The Bankruptcy Code has rules that govern whether a debtor can use a specific state’s bankruptcy exemptions. The rules are designed to prevent a person from moving to a state that has favorable bankruptcy exemptions just to file a Chapter 7 case and then move back to their home state.

Where you reside for the 730 days before filing a Chapter 7 determines the bankruptcy exemptions you may use when you file for debt relief. If you have lived in your current state for 730 days before filing for bankruptcy relief, you use that state’s options for bankruptcy exemptions.

However, if you have lived in your current state for less than 730 days, you must look back to the 180 days before the 730 day period. You use the state law for bankruptcy exemptions in the state in which you lived for the better part of the 180 days before the 730 days before filing your Chapter 7 petition.

If the rules result in a debtor not being eligible to use state exemptions, the debtor must use the federal exemptions.

We understand that these rules may be difficult for many people to calculate who do not have experience in the bankruptcy system. However, we have designed our system to assist debtors in determining the correct bankruptcy exemptions to claim when they prepare their Chapter 7 documents through Upsolve’s bankruptcy process.

How Do Spouses Choose Bankruptcy Exemptions?

When spouses file a joint bankruptcy petition, each spouse is entitled to claim bankruptcy exemptions in property they own. Therefore, spouses may each claim bankruptcy exemptions in jointly owned property. For instance, if the debtors own their home jointly, the bankruptcy exemption is doubled because each spouse is entitled to his or her exemption in the home.

What Happens to Non-Exempt Property?

In a Chapter 7 bankruptcy case, a Chapter 7 trustee may seize non-exempt property for the benefit of the bankruptcy estate. The Chapter 7 files a motion to sell or auction the property for the benefit of the unsecured creditors.

Once the property is sold, the proceeds of the sale are divided among the approved claims filed by unsecured creditors. If the debtor claims an exemption in the property, the trustee pays the debtor the total of the exemption before paying any money to the unsecured creditors.

In some cases, a Chapter 7 trustee allows a debtor to “purchase” the non-exempt equity in property. The trustee may negotiate a slightly lower payment from the debtor to avoid the cost of auctioning the property.

Do Debtors Usually Lose Property in a Chapter 7 Bankruptcy Case?

In most of the Chapter 7 cases filed in the United States, the debtors keep all their property. Bankruptcy exemptions protect all the property in most Chapter 7 cases filed. A Chapter 7 case in which the debtor does not lose any property is called a no-asset Chapter 7 case. Most Chapter 7 cases are no-asset cases.

However, debtors should carefully analyze their property and the bankruptcy exemptions they may claim to determine if any property may be at risk if they file a Chapter 7 case. In a few cases, debtors may choose to file for Chapter 7 debt relief even though they may lose a piece of property because they can get rid of thousands of dollars in debt. The amount of debt they can eliminate outweighs the value of the asset they may lose.

If you want to find out if your property is protected in a Chapter 7 bankruptcy case, contact Upsolve for a no-cost bankruptcy analysis. Do not let the fear of losing property stop you from receiving free bankruptcy help today.

Chapter 7 Bankruptcy Case Give Debtors a Fresh Start

It can be difficult to recover from a financial hardship when your creditors are seeking wage garnishments, foreclosure, repossession, and debt collection judgments. Filing a Chapter 7 case can get rid of your debts so that you can begin to recover and rebuild after a financial crisis. Debts discharged in a Chapter 7 case are gone forever. The creditor cannot take any action to collect a discharged debt.

Upsolve provides Chapter 7 bankruptcy services at no cost to low-income individuals. Watch videos of our past users as they explain how Upsolve helped them get out of debt at no charge.

Can I File Chapter 7 Without An Attorney?

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Yes, you can file a Chapter 7 bankruptcy case without an attorney. If you can hire a bankruptcy attorney, we encourage you to do so. Bankruptcy attorneys have experience filing bankruptcy cases and are extremely helpful when a person needs legal advice regarding debt relief.

However, some individuals do not have the money to hire a bankruptcy lawyer. They barely have enough money to pay their living expenses each month. Therefore, Upsolve created a system that helps low-income individuals get the debt relief they need even when they cannot afford to pay an attorney.

We do not ask for any money for our services. You are only responsible for paying the costs associated with filing a Chapter 7 bankruptcy petition, such as the filing fee payable to the Bankruptcy Court and the cost of your required bankruptcy courses.

You can get out of debt by filing a Chapter 7 bankruptcy case without hiring an attorney. Start our free bankruptcy analysis to discover if you qualify for our free bankruptcy services.

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