How it Works
As mentioned above, bankruptcy exemptions apply in Chapter 7 bankruptcy to prevent the trustee from liquidating your assets. When you file Chapter 7 bankruptcy, the court will put a trustee on your case, who will manage everything you own. As part of the paperwork in Chapter bankruptcy, you will be asked to list everything you own. The list becomes the 'estate,' and the court puts the trustee in charge. The role of the trustee is to help you pay off your unsecured creditors, even if it means liquidating or selling your assets, to get enough to repay them before dismissing your debts. Fortunately, exemptions will keep some items from liquidation. Here are some bankruptcy exemptions:
- Motor Vehicles (exempt to a certain dollar amount)
- Pensions
- Reasonably necessary clothing
- Reasonably necessary furniture
- Household appliances
- Pensions
- Jewelry (up to a certain dollar amount)
- Tools (used for work, trade, or up to a certain dollar amount)
- Damages awarded for personal injury
- Equity in the debtor's home (up to a certain dollar amount)
- Unpaid but earned wages (up to a certain percentage)
- Public benefits received
Some exemptions are more detailed as they have exemptions to a certain percentage or amount. For example, the motor vehicle exemption. Assuming there is a $5,000 exemption for motor vehicles in your state, and your car is valued at or below that valuation. For example, if your vehicle is valued at $4,000, you can keep it. But if the car is valued at $10,000 it is over the exemption, and the trustee can liquidate it to repay unsecured creditors.
While there are a lot of exemptions, some things are NOT exempt. What is considered non-exempt will depend on your location, the type of bankruptcy you file, your total assets, etc. For example, second homes, luxury cars, and items are considered non-exempt and can be liquidated to repay your creditors in Chapter 7 or added to your income in Chapter 13.
How Much Cash Can You Keep in a Bankruptcy?
In bankruptcy, the amount of cash you can keep depends on various factors, including the type of bankruptcy you file and the exemptions available in your jurisdiction. Typically, when you file for bankruptcy, you're required to disclose all your assets, including cash on hand.
In Chapter 7 bankruptcy, which involves liquidating assets to pay off creditors, the trustee may scrutinize your cash holdings to determine if they can be used to repay debts. However, certain exemptions may protect a portion of your cash from being seized. These exemptions vary by state but often include a homestead exemption, which protects a certain amount of equity in your primary residence, and exemptions for essential items like clothing, household goods, and tools of the trade. Some states also offer a wildcard exemption that can be applied to any asset, including cash.
In Chapter 13 bankruptcy, which involves creating a repayment plan to pay off debts over time, you get to keep your assets, including cash, but you must use your disposable income to make payments to creditors.
Overall, the specific amount of cash you can keep in bankruptcy varies depending on your individual circumstances and the laws of your state. It's essential to consult with a bankruptcy attorney who can provide guidance based on your situation and help you maximize the protections available to you.
How Chapter 13 Bankruptcy Protects Non-Exempt Assets
Chapter 13 works differently than Chapter 7. Instead of the trustee trying to sell your assets to pay off creditors for items whose equity is higher than the exemption, under Chapter 13, you pay off your creditors. A repayment plan is formulated for all your debts, and you get a longer time to repay your debts and keep what you own. Therefore, regardless of the exemptions, you get to keep your car, home, and other assets. As soon as you file Chapter 13, you need to disclose all you own, how much income you have, and your total debts. These three factors will help you come up with a repayment plan and how much you will be paying back monthly.
State Vs. Federal Exemptions
Exemption laws exist at the state level and federal levels. The state exemptions are exemption laws your state offers, which could differ from other states' exemptions. State exemptions don't always match federal exemptions, which are offered nationally. Some states allow debtors to choose between using state or federal exemptions, while some states don't allow the use of federal exemptions. Here is a list of the states where you can use federal exemptions:
- Alaska
- Arkansas
- Connecticut
- District of Columbia
- Hawaii
- Kentucky
- Massachusetts
- Michigan
- Minnesota
- New Hampshire
- New Jersey
- New Mexico
- New York
- Oregon
- Pennsylvania
- Rhode Island
- Texas
- Vermont
- Washington
- Wisconsin
Assuming you live in Texas, you can consider filing for bankruptcy using the state exemption. In New Jersey, the exemptions are quite strict, and most prefer filing bankruptcy under federal exemptions, which are more lenient. It is important to consult a bankruptcy attorney as they are familiar with your state and federal exemptions. Therefore, they can help you decide which exemptions will help you keep more assets.
A Peek into How Bankruptcy Works
Bankruptcy is a legal process designed to help individuals or businesses unable to meet their financial obligations. The judge assigns a bank trustee to the case to take over and manage the finances of the party filing for bankruptcy.
There are many reasons why one might need to file for bankruptcy- divorce, unemployment, recurring credit card debt, overwhelming medical bills, etc. You can choose to file different bankruptcy chapters, but the most common are Chapters 7 and 13. Chapter 7 is more intense than Chapter 13 because the court can liquidate your assets and use the proceeds to repay your debt. Fortunately, the process is faster, and in the end, you will have less debt than when filing. Chapter 13, however, is for people whose financial situation has changed. They have less income, which they can use to repay their debts, but they need help to lower their payments and get more time to repay them.
All types of bankruptcy are helpful, depending on the situation. Most people shy from filing bankruptcy for fear of losing their assets, the record being made public, and other misguided fears. The thought that bankruptcy is intimidating is often based on misconceptions, and it is important to do your research.
Yes, you will need to give the trustee control over your 'estate. Depending on the bankruptcy, they can either liquidate the assets and pay your debts or meet with your creditors in your presence to negotiate a suitable payment plan. It does feel like losing control, but there are exemption laws to safeguard your assets, even in bankruptcy.
Will I Lose My Home and Car?
You don't have to. Each state has bankruptcy exemptions you can use to retain ownership of your home and car. Use this bankruptcy exemptions calculator to see if you risk losing your belongings before you file.
