Exempt Assets in Bankruptcy

Defining exempt assets in bankruptcy is one of the most important considerations for people who are contemplating filing for Chapter 7 Liquidation or Chapter 13 Reorganization bankruptcy. The most pressing for concern for potential filers in this regard is whether or not they will be able to keep their home, automobile, personal effects and retirement or savings vehicles. What many people do not realize is that bankruptcy is a type of consumer protection: it is a way to start over again financially. But in order to start over again, a person must have something to start over with. Stripping a person of all assets, property and cash would leave them in a desperate situation without any means of recovering. For this reason, exempt assets in bankruptcy should be carefully reviewed prior to filing for Chapter 7 or Chapter 13.

Federal bankruptcy regulations governing exemptions are different than those at the state level. However, more than a dozen states allow a petitioner to choose between state level exemptions or federal level exemptions. For those people who have not lived in their state for at least two years, they may be forced to take the exemptions of the previous state they lived in, or if no state exemption laws apply because of residency issues a person is generally able to elect for the federal exemptions. While you should always consult with a professional bankruptcy attorney, there are a number of general guidelines concerning exemptions:

*House and Property

If you own your home and have no equity in it, in most cases the trustee will consider it exempt and leave it to you. In this case you will still be responsible for paying the regular mortgage payments or your lender could foreclose on the property. If you do have equity it must not be above a certain threshold that varies from state to state. Equity under this threshold allows your home and cash value to be exempt. Equity above this amount allows the bankruptcy trustee to sell your property, return the exempt amount to you and use the remainder to satisfy creditors. Current federal exemption amount is $21,165. Check with your attorney for state level exemption amounts.

*Automobile

The exemption rules for automobiles are very similar to houses and property. In most cases a petitioner can elect to surrender the vehicle to the lender or trustee, or they can continue paying as agreed in the event there is no equity in the vehicle. Federal exemption for automobiles is $3,450. Any equity above this permits the trustee to sell the vehicle, return the exempt amount to you and pay the difference to creditors. However, in some cases you can take an additional exemption by claiming the vehicle as a critical tool of your respective trade. This additional exemption may enable you to keep the vehicle.

*Personal Effects

Personal effects are generally not worth enough money to be useful in liquidation and repayment efforts. Federal exemptions on personal effects are at $11,525 total, with no particular item to be worth more than $550. This includes clothing, electronics, jewelry, art, tools and other items.

*Cash

Starting out with some cash after a bankruptcy is imperative and the federal government allows most people to retain up to $2500 for operating and basic necessity purposes.

* Retirement / Savings Vehicles

In most cases cash value accumulated in retirement and savings vehicles are exempt from bankruptcy filings. This includes more than $1 million in an IRA, unlimited funds in a 401K plan, and many other types of retirement plans. Each state has different rules in this regard, so the professional advice of a bankruptcy attorney is extremely important.