Can I Keep My House or Car After I Declare Bankruptcy?

Published Sunday, August 2nd, 2020 by Attorney Dave Falvey - 599 views

People ask me, how can I keep my cars, home, pension and get rid of my debts, is that possible?

In order to help consumers with their fresh start – and that’s what Congress has as an objective with the bankruptcy code – common sense concluded that if you take the clothes off someone’s back, you haven’t helped that person or achieved the objective of having a fresh financial start.

Therefore, Congress enacted into the Bankruptcy Code, sections which are called your exemptions, or keep the clothes on your back.

Chapter seven is technically called a liquidation of debts and assets. And many people upon hearing this, they panic and think that all their assets are going to be liquidated in a chapter seven. I have told clients to picture a conveyor belt, and on that conveyor belt you place all of your debts and all of your assets.

The conveyor belt drops everything into a fire, and whatever is dropped into the fire is liquidated. First you load on the conveyor belt all your debts, and those debts are conveyed and dropped into the fire, and are liquidated. Next, you place all of your assets onto the conveyor belt, which is headed towards the fires of liquidation. But you have exemptions, and those exemptions allow you to take the assets off of the conveyor belt, and you keep those assets.

That’s why when clients ask me, “Will I lose my home in bankruptcy?”

And I answer, “Your exemptions will protect your home. And if they don’t protect your home, because you have too much equity, we don’t file your petition.” And the same goes for your cars and all other assets. Therefore your exemptions are very important in bankruptcy, and can be very tricky when interpreting them.

What is exempt?

Now what are those exemptions and what is exempt? I’m going to give you an overview of it and I’m going to refer to the code section 522(d)(1) to (d)(12). Now, first you should know that there are federal exemptions and state exemptions (Connecticut). Connecticut has not opted out of state exemptions, which means you can choose either state or federal exemptions when you file, but you can’t mix and match state and federal.

Exemption planning is one of the trickiest areas of the bankruptcy law. As you can imagine, I’ve had to warn that what I’m about to say is only for discussion purposes, you can’t rely on this information until you’ve consulted with an attorney. One fact, which is different or not discussed, as applied to you, could completely change anything I present to you here.

Before I list the exemptions let me explain how the homestead exemption works. You have a federal homestead exemption of $20,200 under what’s called 11 United States Code Section 522(d)(1).

If you have a home with a fair market value of say 90,000, and the mortgage debt is 95,000, you don’t even need to use your homestead exemption. What that means is that the house doesn’t even go up on the conveyor belt, because there’s nothing to exempt out. The trustee in bankruptcy, can’t go after your home because the mortgage ahead of the trustee means there’s nothing for the general creditors.

Now let’s suppose that the debt on your home is $95,000, and the fair market value $111,150; by using what’s called (d)(1) exemption, you first add the mortgage of $95,000 to the exemption of $20,200, and that comes to $117,200. And therefore the house is exempt from creditors.

But let’s suppose your house is worth $130,000. The debt is 95,000. There’s equity of $35,000, which would be exempt if you and your wife, for example, own the home. Husbands and wives can file joint petitions and can gross up or add their exemptions together.

The husband is entitled to $20,200. The wife is entitled to$20,200, for a total of$40,400 worth of homestead exemption.

Connecticut’s homestead exemption is$75,000 each, for a total of$150,000 in the joint case. But let me caution, what I’m discussing here is very simplistic. It can be immensely more complicated than my examples.

But that’s some of the basic background on exemptions and how they’re used.

List of Federal Exemptions

Now, I’m just going to list the federal exemptions. And here we go,

• (d)(2) under the code, it’s called a car exemption,$3,225.
• (D)(3) personal property, furniture, and other items in your household usually,$10,755 each.
• Four, jewelry,$1,350.
• Then there’s the wildcard, which is$11,200, which can be applied to anything. But again, this is very simplistic what I just told you.
• (D)(6) tools of the trade come to $2025.
• There’s (d)(7) and (d)(8) for life insurance, and you can have a $10,775 in cash-surrender value in an insurance policy or policies.
• (D)(9) professionally prescribed health aids, a hundred percent exempt.
• (D)(10) a hundred percent exemption for the right to receive social security benefits, unemployment, veterans benefits, disability benefits, meaning workers’ compensation, which is an especially tricky area, alimony and support, reasonably necessary for your support. Now all of that is exempt 100%.
• Pension payments, exempt.
• An award under crime victims reparation, payment for wrongful death to the extent that’s necessary for your support –  actually that’s 100% exempt.
• Payment under a life insurance contract, a payment not to exceed $20,200 for bodily injury, but not for pain and suffering, a payment in loss of future earnings again, to the extent necessary for your support, 100% exempt.
• And there’s the recent 522(d)(12), which specifically exempts retirement funds held in specialized accounts. Again, those are 100% exempt.

If you can exempt out a property in chapter seven, then by using what’s called a chapter seven liquidation analysis, you might have to use a chapter 13 to get out of debt by paying back to the creditors what isn’t exempt in the chapter seven, in order to keep your property.

Now, exemption planning is one of the toughest areas of consumer bankruptcy. And I’ve seen where a judge’s unpublished decision has wreaked havoc on bankruptcy filings for the unwary, because indeed by definition, the decision is unpublished and that means that it’s not in the law library, or to be found in the major legal databases like Westlaw, which is the largest and most sophisticated legal database used by judges and lawyers.

An unpublished decision is only found in the courtroom. And that’s what it means that that decision is unpublished.

But what I wind up telling clients is that with good exemption planning, you keep all of your assets when you file a chapter seven, and you don’t liquidate those assets for the most part.