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Bankruptcy Exemptions

Retaining property during bankruptcy is usually a matter of calculating equity in your property and applying legal exemptions. Equity is the difference between the amount you owe on the property and its fair market value.

For instance, if you own a Ford vehicle worth $10,000, and you owe Ford Motor Credit $2,000, then you have $8,000 worth of equity. The math is, $10,000 – $2,000 = $8,000.

State and Federal Bankruptcy Exemption Laws

Ownership issues

Sometimes calculating equity can be elusive for the average person or even an inexperienced attorney. The bankruptcy process is only concerned with your interest in property.

Consequently, if you drive a vehicle that isn’t titled in your name, you probably have no equity in the vehicle. If you then start to make the payments on the vehicle, you’ll then have an equitable ownership interest. Likewise, if you share ownership of a motor vehicle, you may only have a percentage interest in the property.

Determining fair market value

Sometimes this is a tough process. Often times, debtors and the bankruptcy trustee may not see eye-to-eye regarding the fair market value of property. Generally speaking, a debtor wants to maintain that the value of their property is low in order to conserve legal exemptions.

The trustee however, wants the value of the debtor’s property to exceed all available exemptions so that money is available to pay creditors and put the case to rest. In some cases the bankruptcy judge is asked to decide the value of an asset. This is a rare scenario but at times it does happen.

Both the debtor and trustee must use common sense when determining fair market value. If the debtor undervalues the property, the trustee or a creditor may file an objection and seek an order that directs the debtor to turn over the property. This is not a welcomed outcome. If the trustee overvalues the property, the sale of the item may be less than the costs of the sale. Some assets are less attractive to the trustee because of the difficulties of selling the asset (e.g. a horse).

Exemptions

Correctly applying your exemptions to property with equity is a critical part of retaining property in bankruptcy. An exemption is a legal protection that shields some or all of the equity in your property from creditors (including the Chapter 7 bankruptcy trustee). Most exemptions are capped, so any equity in an asset that is over and above the exemption amount is fair game during bankruptcy.

An exemption to protect your equity may be found in the Bankruptcy Code, another federal law, or in a state law. Please note: congress allows individual states to decide whether to allow debtors to use only state law exemptions, or choose from state exemptions and the exemptions found in the federal Bankruptcy Code.

Currently there are nineteen states and the District of Columbia that allow use of the federal bankruptcy 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.

The debtor claims an exemption of property on Schedule C. Thereafter a calculation is made to determine whether there is any non-exempt equity remaining for creditors.

For instance, if you own a Ford vehicle worth $10,000, and owe only $2,000 on an allowed lien to Ford Motor Credit, you are also allowed $3,675 in a federal motor vehicle exemption. The calculation to determine any non-exempt equity is the fair market value of the car minus the amount you owe, minus the legal exemption; or $10,000 – $2,000 – $3,675 = $4,325 in non-exempt equity. I know this information may seem a little complicated to understand and if this is the case, you can call us anytime at and I’ll be more than happy to clarify this for you. Now, let’s get back to where we were.

Stacking exemptions

In many cases exemptions may also be “stacked.” One common way to stack exemptions is to use the exemptions of both husband and wife to protect an item of property. For instance, the federal law allows a husband and wife to use both of their exemption to protect a motor vehicle. Applying both spouses’ exemptions looks like this:

  • $10,000 – $2,000 – $3,675 – $3,675 = $650 in non-exempt equity

At this point the trustee is likely not interested in the non-exempt property available in the motor vehicle. It is de minimis, which is Latin for “not worth much”. However, the debtors may also have other “wildcard” exemptions to apply to fully protect the equity in the motor vehicle.

Every state allows their residents wildcard exemptions. The federal wildcard exemption is $1,225 for an individual debtor, $2,450 for joint debtors, and up to $11,500 per debtor for any unused homestead exemption.

The federal wildcard exemption can be added to any exemption to increase the protection of equity. After using $650 of the debtors’ wildcard exemptions, there is no equity remaining in the motor vehicle:

  • $10,000 – $2,000 – $3,675 – $3,675 – $650 = $0 in non-exempt equity

It is important to determine an accurate value of all property and to calculate all legal exemptions before filing bankruptcy. Then you and your attorney can discuss strategies for protecting your property.

In Connecticut, this may mean filing Chapter 13 bankruptcy, strategically using exemption amounts, selling property, surrendering the asset in bankruptcy, or purchasing the non-exempt equity from the trustee.

Help choosing exemptions

Exemptions play a large part in bankruptcy and knowing what they are and how they work is important to your case. Although your attorney takes care of working out this part of your case, it’s with your help that you get the protection you need. Exemptions play a part in other legal areas but today we’re focusing primarily on exemptions related to bankruptcy.

So what are exemptions?

Exemptions are simply laws that protect property from creditors and the trustee during a bankruptcy. Property that is “exempt” cannot be taken by the trustee or by unsecured creditors. Exemptions are only available to individuals. Businesses and corporations cannot claim bankruptcy exemptions. The stated purpose of exemption laws is to prevent harm that would befall the public interest if creditors could render debtors wards of the state. See In re Ballard, 238 B.R. 610 (Bankr. M.D. La. 1999).

Think of it this way, if creditors are allowed to take everything from a debtor in bankruptcy, the debtor would be like the destitute and naked man forced to wear a wooden barrel held up by a pair of attached suspenders. That isn’t very practical from a societal standpoint, so most federal and state exemption laws allow the debtor to keep property reasonably necessary for the welfare of the debtor and his family.

Exemption rules for separate states

Exemptions can vary widely between states. Most states exempt some equity in at least one personal vehicle, and every state has an exemption that protects equity in a home (called a “homestead exemption”).

For instance: the federal homestead exemption is $21,625; Alabama protects a mere $5,000 in home equity; Illinois residents can protect $15,000; Nevada residents can protect up to $550,000; and many Texas homeowners residents enjoy an unlimited homestead exemption.

As a result, some wrongdoers in the Enron scandal reportedly transferred assets into lavish homes built in Texas before they filed personal bankruptcy.

Largely due to the public outcry after certain Enron executives sought to shield their assets using homestead exemptions in bankruptcy, Section 522(p) was added to the Bankruptcy Code. This section states that a debtor may not exempt “any amount of interest” that was acquired in residential or homestead property within 1215 days (three years, four months) preceding the filing of the bankruptcy petition that exceeds in the aggregate $146,450 (which is adjusted periodically for inflation) in value.

In the end, the debtor’s homestead exemption is capped under Section 522(p) if the property was purchased within 1,215 days of the bankruptcy filing.

How long to exemptions last?

Exemptions last forever. Section 522(c) of the Bankruptcy Code makes it clear that once property is allowed as exempt in bankruptcy, it is beyond the reach of pre-petition creditors (there are a few exceptions to this exemption protection, including non-dischargeable taxes and domestic support obligations).

Suppose, for instance, that the debtor was found liable for an intentional tort – he burned down his neighbor’s house. The debt is determined non-dischargeable during his Chapter 7 bankruptcy, but his claim of exemption on his house was allowed. The house is forever beyond that judgment creditor’s reach.

Note that while exempt assets are protected from many significant non-dischargeable debts (such as those based in fraud or from a non-support claim from a divorce), post-petition assets, such as property acquired after the bankruptcy filing or wages not part of a Chapter 13 plan, are fair game.

Selecting exemption laws

The election and application of exemptions can be a decisive factor in obtaining a fresh financial start. Your bankruptcy attorney will guide the you through the complex exemption laws and ensure that assets are properly protected when the bankruptcy case is filed.

Very few individuals lose property in a Chapter 7 liquidation bankruptcy, but it is important to identify property that may be at risk prior to filing the case. In most cases there are legal options to sell, transfer, or surrender property that is not protected by legal exemptions.

Section 522 of the Bankruptcy Code allows the debtor to elect either federal exemptions or state exemptions to protect property, not both. However, the Bankruptcy Code also allows states to “opt out” of the federal exemptions and restrict debtors in these states to state bankruptcy exemptions only. See Section 522(b)(2).

Alaska, Arkansas, Connecticut, District of Columbia, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Pennsylvania, Puerto Rico, Rhode Island, Texas, Vermont, Virgin Islands, Washington, Wisconsin and, most recently, Oregon all allow debtors to use either state exemptions or the federal exemptions contained in the Bankruptcy Code.

The remaining states have “opted out” of the federal bankruptcy exemptions and instead force residents to use its own set of state exemptions.

Federal bankruptcy exemptions are listed in the federal Bankruptcy Code and allow the debtor to protect a certain amount of equity in various assets, such as the homestead exemption, the automobile exemption, etc. Whether the debtor is able to choose a particular state’s exemption laws depends on the domicile of the debtor.

The debtor’s domicile is where the debtor permanently resides. However, in an effort to curb “abuse,” the Bankruptcy Code decides where the debtor is domiciled when the debtor has recently moved through a two part test:

  • The 730 Day Rule: when the debtor has been continuously domiciled in a state for 73
    0 days (2 years) before filing bankruptcy, the Bankruptcy Code states that the debtor applies that state’s exemptions or the federal exemptions (if allowed).
  • The 180 Day Rule: if the debtor was not domiciled in the same state for two years, then the debtor must use the exemptions of the state where he was domiciled for the greater portion of the 6 months prior to the two years preceding your bankruptcy.

To illustrate, suppose a debtor is domiciled in Texas from January 1, 2009 to January 1, 2011 (2 years), and then moved to Nevada; on January 1, 2012, the debtor files bankruptcy in Nevada. Even though the debtor lived in Nevada for twelve months, he must use the exemption laws of Texas.

Why? Because he was not domiciled in Nevada for a full two years (the 730 Day Rule), and for the six months prior to the two years preceding the bankruptcy filing the debtor was domiciled in Texas (July 1, 2009 through December 31, 2009).

So in the end, and what you can take from this information is that for the most part you’re protected from losing everything you own, but you need the help of an attorney who specialized in bankruptcy to help you get the full protection you require.

Should I Compile this information myself?

Speak to a professional. I’m only attempting to help you get your head around some of the exemptions laws and how they can affect your case. In person I will be able to make this much more clear and easier to understand. So contact us today and get the help you need from the professionals and get your finances back on track.