With a chapter 7 bankruptcy filing, exemptions play a huge role. Chapter 7 is known for allowing filers a fresh start by taking away all or most of their debts. Unfortunately, it's also known the liquidation filing because you may be forced to liquidate some of your personal property. The best way to avoid losing property is with exemptions. This area of bankruptcy can be complex and confusing for many filers, so take a look at a highly simplified explanation of what exemptions can do for you.
Why is Property Lost?
When you declare bankruptcy, you are also declaring that you have no way of paying your debt within a reasonable time frame. Part of the calculation to determine if you can file is an examination of your debts, assets, and income. If you are found to have valuable assets like a home, boat, vehicles, artwork, etc. you might have to surrender it to the bankruptcy court. They then sell the asset and pay certain high priority creditors (often the IRS).
When a lot of property is surrendered, however, it can only make matters worse for a bankruptcy filer. To keep filers from having nothing left after they file, exemptions exist. Exemptions are dollar amounts and/or specific items that are exempt from seizure by the bankruptcy court. For example, some states allow filers to keep all work-related items including tools, supplies, clothing, and more. Also exempted are things like heirloom jewelry or a home. Each state is very different in the way they provide exemptions. Exemptions can apply to the following:
- Homes – usually only the primary family residence
- Income from a salary or other sources
- Used items like furniture, clothing, and other personal items
- Benefits from the government like food stamps and Social Security
What to Understand About Exemptions
If you have a lot of valuable property, speak to your bankruptcy lawyer about what might be lost with a filing. Take a look at a few other exemption considerations:
- Some states allow filers to use either state exemptions or federal exemptions.
- Some states offer filers an additional exemption to be used for whatever they wish known as a wildcard exemption.
- If you have recently moved, you may be able to use the exemptions for the state of your previous residence.
- When an exemption is expressed as a dollar amount, you should deduct that amount from the equity of the item and not its value. For example, if you have a loan balance on a car or home, deduct both the loan balance and the exemption from the value to determine if you can keep it or not.
The above information is only a summary of a complex issue that needs to be discussed in full with your bankruptcy lawyer. Learn more about bankruptcy law today.