Designed to give individuals a fresh start, a Chapter 7 Bankruptcy recognizes the need for basic amenities in order to maintain a basic standard of living. That being said, there are some exceptions afforded to you by law after a Bankruptcy petition is granted. Note though that the law is very specific in this regard which means that you’ll have to be completely aware of what you’re claiming as an exception.
The good news is that there’s an extensive amount of properties that can be exempted. Following are the said properties and the nature of their exemption.
Goods and Clothing
Clothing and furnishings are often exempted fully because their value is so little than selling them off won’t constitute a huge repayment in the plan. Note though that there are exceptions to this. For example, if you happen to own a one-of-a-kind bag or luxury items valued way over their average cost, then there are chances that the trustee will use this to pay off any liabilities. Household appliances typically fall within this exemption.
Equity is essentially the market value of your property less the unpaid loan you have on said property. Properties devoid of equity are usually left alone in bankruptcy cases which mean that there’s very little chance the trustee will decide to sell them off for the repayment of debts. Note though that this doesn’t annul your obligation with the lender when it comes to payment. You are still obliged to pay off the monthly payment plus interest rate; otherwise the lender is within their rights to take back the property.
If you have equity however, the trustee will determine exactly how much of the equity you will be exempted from paying. Hence, this means that only a portion will be allowed under exemptions and the remainder is still something that will have to be paid off under the bankruptcy agreement. Note that in most cases, a creditor will require that you reaffirm the debt. This essentially means you’ll have to sign another contract taking into account the recent changes in your financial situation.
A homestead typically falls under secured loans if you managed to purchase it with the help of loan. If you own it free and clear however, exemptions are allowable up to a certain extent. This varies from one location to another but the typical federal exemption is around $20,000. Be aware of how much is granted in your place of residence.
Jewelry is exempted, but only up to a certain extent of the value. This is often done with the assumption that some of the jewelry are heirlooms or have non-financial value and are therefore given exemptions. Note though that generally, family heirlooms are NOT exempted but under jewelry and within financial limits, a petitioner may keep sentimental properties.
Pensions or any other retirement account are also left alone by the trustee. This is in deference to the keeping of a separate account for the retirement or care of an individual when they are no longer capable of work. Note though that it must be a genuine retirement account and must pass the test of fraudulence, otherwise the trustee will not think twice about taking it. The good news is that pensions are fully exempted once proven to be of genuine value.
Tools of Trade
The law recognizes the need to continue earning a living after a bankruptcy petition. Hence, tools of the trade of the petitioner are often exempted from liquidation – subject to a certain limit. This mainly applies to professionals who are self-employed or have their own office. For example, a chiropractor may choose to keep the tools utilized for practicing his trade.
Unpaid but Earned Wages
For employees, earned wages that are still unpaid may also be exempted. Note though that this is only up to a certain amount as well.
Public Benefits in the Bank
Public benefits accrued in the bank are also subject to exemptions. Such benefits can be any of the following: public assistance, unemployment compensation, and social security.
Damages Resulting from Personal Injury
If you’re currently collecting damages due to personal injury, the amount will be awarded fully to you and exempt from the bankruptcy liquidation.
Generally, anything that isn’t listed in the exempt properties is considered as non-exempt. This gives the trustee full capacity to sell them off and apply the proceeds to the repayment of debts. Typically however, non-exempt properties include but are not limited to the following:
- Musical instruments unless the petitioner is a professional musician in which case, this will be recognized as tools of trade;
- A second car or a second home;
- Any collections considered to be valuable;
- Family heirlooms;
- Cash, stock, and other investments.
How it Works
Note that exemptions are not absolute. The law often puts a cap limit on how much you can exempt per property. This means that you don’t have to be mindful of just the total but also the market value of each property minus how much you can actually exempt. This varies from one location to another so the input of a bankruptcy attorney is definitely a must.
To illustrate, your location might have a car exemption of $5,000. If your car currently has a value of $3,000 then there’s a good chance you can keep it with you. However, if the car costs around $7,000 then it will be liquidated to pay off your liabilities.
Discretion of the Trustee
The trustee is often sufficient discretion when it comes to selling or keeping personal property. Hence, those mentioned above aren’t always absolute. More often than not the determining factor would be the amount contributed to the defrayment of debts. For example, if there’s just a small difference between the market value of a personal property and the exemption limit, the trustee will have to decide if selling the item is worth it. If not, then the car will be kept as your property and notations will be made by the trustee. In some areas, there’s a wild card exemption which means that you can apply it on any single item you see fit, within reason.