Bankruptcy Exemptions: Chapter 7
Most people who consider the option of filing bankruptcy are facing severe financial difficulties, and don't make the decision lightly. In fact, when it comes to Chapter 7 bankruptcy, many people fear the worst in terms of what might happen to their home, cars and property in the event that they do end up filing for relief.
Fortunately for many filers, bankruptcy exemptions take this into consideration. While Chapter 7 bankruptcy is supposed to allow for a fresh start for filers as far as their debts go, it is not necessarily intended to make them start from scratch with regard to all their property. It is for this reason that bankruptcy laws carve out "exemptions" that allow for individuals to keep certain property.
See Chapter 7 Bankruptcy or Alternatives to Filing for Chapter 7 for additional articles and resources.
Types of Chapter 7 Bankruptcy Exemptions Available
Chapter 7 bankruptcy is sometimes referred to as liquidation bankruptcy because it involves gathering the property or assets of the filer, and then selling them to pay off as much debt as possible before the rest of the debt is "discharged" or eliminated. As noted above, however, bankruptcy law protects some kinds of property from being sold off to pay these debts. These protections are called exemptions, which sometimes protect entire types of property, while other times exemptions may have limits as to the value that they may protect, such as a home. Exemptions may also be affected by the filer's tax filing
It is important for filers to know that their state's laws, and sometimes federal law, will establish what set of bankruptcy exemptions are available to them. Every state has its own set of exemptions that may either co-exist with federal exemptions or replace them. It is very important for filers to consult with a local bankruptcy attorney or become very familiar with the exemptions available to them in order to maximize the property they retain.
Below are some of the common types of bankruptcy exemptions that may be available in a typical Chapter 7 filings, along with some short descriptions of how they work:
Homestead exemptions - It should probably come as no surprise that the main pieces of property that filers are concerned about when they file for Chapter 7 is their home. Fortunately, homestead exemptions exist that may protect a filer's home. On the down side, however, there are almost always limits to the amount protected by homestead exemptions. For example, the federal homestead exemption is limited to about $20,000. State homestead exemptions vary widely with some offering significantly more protections from creditors than others.
Car or automobile exemptions - A person's car may also be protected from Chapter 7 creditors and the sale of assets, but state and federal laws will usually put a cap on the amount of the vehicle's value that will be protected. States vary widely on the amount protected from as little as no exemption, up to the full value of a car. The federal motor vehicle exemption was capped at $3,225 in 2010.
Exemptions for personal property - A wide variety of exemptions exist that apply to different types of personal property. The good news generally is that many types of personal property are often exempt from becoming part of the bankruptcy estate. Just some examples include clothing, jewelry, home furnishings, appliances, and much more. The bad news is that there may be per item limits, as well as a total limit, that may apply to these exemptions.
Wildcard exemptions - Wildcard exemptions are sort of a catch-all for property that does not fall into the other categories, or property that exceeds the maximum value for its own exemption. In these cases the debtor may be able to apply the wildcard exemption to protect even more property that would otherwise go to the bankruptcy estate. Unfortunately, wildcard exemptions are not available in every state, and are also limited in value.
For anyone thinking of filing bankruptcy, becoming familiar with the protections that are offered by the various different types of bankruptcy exemptions can be very important. However, as suggested above, figuring out what laws and exemptions can apply to different types of property can be complicated. As a result, for some filers, it may be a good idea to consult with a local bankruptcy attorney who can help them navigate through the process.