Bankruptcy Exemptions In Chapter 7 and chapter 13 bankruptcy

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Bankruptcy Exemptions: An Overview

Filing for bankruptcy is a last resort for many people struggling immensely with financial issues and non-payment of dues. In this trying time, bankruptcy exemptions play a massive role in both chapter 7 & chapter 13 bankruptcy. While exemptions in chapter 7 bankruptcy help determine how much property can you keep, those in chapter 13 are used to keep your repayment plan payments low. Before delving deeper, it is important to know about bankruptcy exemptions.

What are Bankruptcy Exemptions?

During bankruptcy, not all your assets are sold off to pay your dues. Bankruptcy exemptions help keep some assets like an inexpensive car, clothes, retirement account and professional tools etc. with you, so that you are able to start afresh. If an asset can be exempted, you can be assured that the bankruptcy trustee appointed for your case will not sell it to pay off your creditors.

According to lawyers from Sacramento law firm Recovery Law Group exemptions are available to protect specific kind of property like furniture, motor vehicle etc. up to a fixed amount. Sometimes, you might be able to protect the entire value of an asset, while “wildcard exemptions”, as the name specifies, can be used to protect any property you own.

Thanks to bankruptcy exemptions in place, people can easily protect the basic necessities for a decent living and might be able to protect other things like burial plot, religious texts, a seat in a house of worship and sometimes chickens and feed too (in some states). However, there are some exceptions to bankruptcy exemptions, like:

  • Your luxury homes, yachts, expensive artwork or invaluable collections cannot be exempted. You are required to sell of these valuable assets to pay off loans instead of filing for bankruptcy.
  • Wedding rings up to a fixed amount can be protected by the state, but precious gems and antique jewellery or designer watches are not covered under bankruptcy exemption.
  • Animals rescued from the shelter are safe from the trustee as selling it will prove costlier for them. However, if you own show dogs or race horses for breeding purposes, you might have to turn them over, else pay to keep them, when you file for bankruptcy.

How Does Exemption Work?

The role of exemption varies and depends under which chapter the defaulter has filed for bankruptcy. In chapter 7 or liquidation bankruptcy, the trustee sells your non-exempted assets to pay the creditors. With exemptions in place, the trustee cannot sell any assets protected by exemptions. If you have an asset whose value is below the exception limit, you can keep that with you.

In chapter 13 bankruptcy, you can keep all your property and work towards reorganising your debt. However, the amount you need to pay creditors will depend on how much property can be exempted. Non-priority unsecured creditors like credit card companies etc. can receive an amount equal to non-exempt assets. Thus under chapter 13 bankruptcy, with exemptions in place, your repayment plan payments are lowered by reducing the amount you are expected to pay the creditors.

State & Federal Bankruptcy Exemptions

The bankruptcy exemptions vary from one state to another, with federal law too providing exemption. While some states allow you to choose from either the federal or state’s bankruptcy exemption; some others offer you just the state’s exemption. The eligibility of bankruptcy exemptions depends on where you have been living for the past 2 years (domicile requirement).

Federal Non-Bankruptcy Exemptions

Apart from the state and federal bankruptcy exemptions, another set of federal exemptions known as non-bankruptcy exemptions exists which serve the ulterior purpose of protecting your property during bankruptcy proceedings. However, there is a catch. You can avail federal non-bankruptcy exemptions only if you combine them with your state’s bankruptcy exemptions; i.e. you cannot combine federal bankruptcy and non-bankruptcy exemptions together!