Most Chapter 7 bankruptcy cases are no-asset cases. That means the debtors give up nothing to the trustee. The exemption systems permit debtors to retain the means of day-to-day living, free from the claims of their creditors. The point of bankruptcy is to get a fresh start and that is only possible if the debtor has something to start with. In addition, used household goods and personal effects have little resale value, and so do not represent a real source of value to repay creditors. Congress created a set of exemptions in the bankruptcy code but allowed each state to opt-out of those exemptions in favor of state law exemptions. Sixteen states allow debtors to choose between federal and state exemptions. In order to use a state’s exemptions, you must have lived in that state for two years prior to filing. If you haven’t lived there for two years, you must use the exemptions of the state in which you lived for most of the six months prior to the two-year look-back period.
How Liens Impact Bankruptcy Exemptions
Note that exemption amounts refer to your equity in the asset. If you co-own the asset, only your share of the equity is relevant. If an asset is subject to a mortgage or a lien, your equity is the value of the item after deducting the amount of the lien or liens (the equity). Imagine that you purchased a home that is currently worth $300,000 and you have an outstanding mortgage loan of $250,000. Your equity in the home is $50,000. If an exemption protects more than $50,000 of equity in your home, creditors can’t touch it. Now imagine you bought the same home but only owe $75,000 on your mortgage loan. In that scenario, you have $225,000 of equity. Unless your state’s exemption protects more than $225,000 of equity, the bankruptcy trustee can sell your home, pay you the amount of the exemption, and give the rest to your creditors. Generally, the trustee won’t sell an asset if you only have slightly more equity than the exempt amount. They’ll only sell if you have enough nonexempt equity to make a meaningful payment to creditors.
Exemptions are meant to ensure that you have the necessary means to live and work. They protect the debtors from creditors who might otherwise seize everything and leave the debtor destitute. While each state has its own exemption rules, there are several major exemptions offered by most states.
Some assets are completely excluded from the bankruptcy process by federal law. Pension rights and 401(k) plans are not a part of your bankruptcy estate and are safe from creditors. IRAs are also excluded from your bankruptcy estate up to $1 million. Social Security benefits, unemployment benefits, disability benefits, veterans’ benefits, and alimony or support payments are excluded from the bankruptcy estate. If you have received or are going to receive an award as damages for personal injury, that amount is excluded from the bankruptcy estate, too.
Under Chapter 7, the wages you earn after you file for bankruptcy are generally not considered part of your bankruptcy estate. That gives you an opportunity to start saving as soon as you file. Wages that you earned before you filed but didn’t receive until after you file are part of the bankruptcy estate. You may be able to keep wages earned before filing and received after filing if you can prove that you need the money for reasonable and necessary living expenses.
A homestead exemption protects some or all of your equity in your home. Generally, for a homestead exemption to apply, the home must be your primary residence. If you’ve moved to a new state, you can’t claim a homestead exemption unless you’ve owned the home for at least 40 months prior to filing for bankruptcy. If you haven’t owned the home for 40 months, you can only take the federal exemption of $23,675.
Household Goods Exemption
The law wants to protect the items you need to survive. That includes your furniture, clothing, appliances, and medical supplies, among others. Federal law exempts up to $12,250 of household goods, as long as no single item is worth more than $575. There are limits to the household goods exemption; you generally can’t keep multiple televisions, art (unless you created it), recreational vehicles such as boats and ATVs, and similar non-essential items.
Wild Card Exemption
Federal law and many state laws offer a “wild card” exemption. This exemption can cover any property or can be added on to any other exemption. The wild card is a way for you to protect items that are important to you but would otherwise be subject to liquidation. The federal wild card exemption protects up to $1,250 of equity in any property, plus up to $11,850 of the unused portion of the homestead exemption. If you only use part of your homestead exemption, you can apply the unused part to any property up to $11,850. If you don’t claim a homestead exemption, you can protect $13,100 ($1,250 + $11,850) of equity in any property.
If you’re drowning in debt and don’t know where to turn, bankruptcy might be your best option. Most debtors have no nonexempt property, which means that they pay nothing to unsecured creditors and their debts are discharged. You can keep cash in Chapter 7 bankruptcy if it qualifies as an exempt asset under bankruptcy exemption laws. You don’t have to give up everything when you file for bankruptcy. You can keep any property that qualifies as an exempt asset including cash. The tricky part is that most state exemptions don’t allow you to protect much cash; however, you might be able to use a wildcard exemption to cover a more significant amount. Read on to learn how bankruptcy exemptions can protect your cash and other property in a Chapter 7 bankruptcy. When you file for Chapter 7 bankruptcy, you agree that in exchange for a bankruptcy discharge, the bankruptcy trustee appointed to administer your matter can take property to pay back unsecured creditors. But, if an item of property or an amount of money is exempt under the bankruptcy exemption laws, you can keep it. The exemptions available to you will depend on the law in your state. Some state exemptions specifically cover an amount of cash (although they’re often minimal, for instance, $300). Other states have wildcard exemptions or general personal property exemptions that allow you to protect any type of property up to a certain dollar limit, including cash.
Cash That Might Be Exempt
Here are some examples of cash (or assets readily converted to cash) that could have additional bankruptcy exemption protection:
• IRs or other exempt retirement accounts or benefits
• unemployment benefits
• public assistance
• cash or bank balances
• Social Security proceeds (as long as they’re held in a separate bank account—these funds lose their protection when comingled with money from other sources), and
• personal injury proceeds.
Cash That Won’t Be Exempt
As a general rule, if you sell exempt property before you file for bankruptcy, the cash proceeds usually lose the exemption protection. For instance, if you’re entitled to a $2,500 motor vehicle exemption, and you sell your car before filing for bankruptcy, the sale proceeds cannot be claimed as exempt under the motor vehicle exemption. But this isn’t always the case. For instance, some state’s homestead exemptions allow you to protect home sale proceeds for a particular period. Also, Social Security proceeds retain their exempt status as long as they can be traced back to their source (for instance, if you deposit the Social Security funds in an exclusive-use bank account).
Consult With an Attorney
It’s important to understand what will happen to your property in bankruptcy. In many cases, if you make an exemption mistake in your Chapter 7 case, you won’t be able to dismiss the matter. The court will move forward and distribute your nonexempt assets to your creditors, even if you lose something you thought you’d be able to keep. Be sure that you understand what will happen to your property before you file.
Exempt vs. Non-exempt Property Under Chapter 7
People who file for bankruptcy seek protection from their creditors for the debts they have incurred. The U.S. Constitution gives this power to the federal government, and the federal government has established U.S. Bankruptcy Courts to handle bankruptcy proceedings across the country. When a person files for bankruptcy protection, he or she can expect to have to turn over a sizeable portion of their property to a so-called bankruptcy estate. A bankruptcy trustee manages this bankruptcy estate, selling property to raise money to pay off a debtor’s creditors. However, a bankruptcy debtor does not necessarily have to turn over everything to the bankruptcy estate. In a Chapter 7 liquidation case, the debtor has to turn certain property over to the bankruptcy trustee. Debtors, whether they are businesses or individuals, are often justifiably concerned about what property they will be allowed to keep and what they must give up.
How Exemption Works
Bankruptcy law allows debtors to keep a certain amount of property after going through bankruptcy proceedings. This is called “exempt” property; it is exempt from the bankruptcy estate. Property that cannot be exempted is, appropriately, called “non-exempt” property. Generally, a bankruptcy debtor can exempt a certain amount of his or her property during bankruptcy. If done right, this can potentially save most of the property of someone going through bankruptcy. Property that is exempt can generally be called the “necessities of modern life.” This generally includes the sort of items that are necessary for living and working. Bankruptcy law is concerned about getting debtors out of crushing debt and putting them back on their feet. Taking everything from them is counterproductive, and bankruptcy law recognizes this fact. Non-exempt property generally covers items that fall outside of the necessities for living and working. Court rulings and general practice experience have established a general idea of what types of property are exempt and non-exempt. Below are examples of property that a Chapter 7 debtor will usually have to give up (“non-exempt” property), and property that the debtor may usually keep (“exempt” property).
Property That Is Not Exempt
Items that the debtor usually has to give up include:
• Expensive musical instruments, unless the debtor is a professional musician
• Collections of stamps, coins, and other valuable items
• Family heirlooms
• Cash, bank accounts, stocks, bonds, and other investments
• A second car or truck
• A second or vacation home
Property That Is Exempt
Exempt property (items that a debtor may usually keep) can include:
• Motor vehicles, up to a certain value
• Reasonably necessary clothing
• Reasonably necessary household goods and furnishings
• Household appliances
• Jewelry, up to a certain value
• A portion of equity in the debtor’s home
• Tools of the debtor’s trade or profession, up to a certain value.
• A portion of unpaid but earned wages
• Public benefits, including public assistance (welfare), social security, and unemployment compensation, accumulated in a bank account
• Damages awarded for personal injury
Exemptions Protect Equity in Property
Chapter 7 is a liquidation bankruptcy. The Chapter 7 trustee sells assets to pay unsecured creditors. However, some equity is protected from being used to repay creditors. If a piece of property or an asset does not have sufficient net equity to justify being sold for the bankruptcy estate, the Chapter 7 trustee abandons (does not sell) the property. The majority of Chapter 7 cases filed in the United States are no-asset cases. In a no-asset case, the trustee does not take any property to sell. The debtor (the person who filed for bankruptcy relief) keeps all his or her property. Net equity is calculated by subtracting any valid lien from the fair market value of the property.
Chapter 7 Bankruptcy Lawyer
When you need a chapter 7 bankruptcy lawyer in Utah, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506