Saturday, March 19, 2011

Bankruptcy exemptions: What property can you keep?

Many people who file for bankruptcy are allowed to keep all their property, though it is important to review and plan bankruptcy exemptions. First of all, the bankruptcy process (particularly in Chapter 7) is designed for a debtor to have property sold off for the benefit of creditors. If you have anything you cannot afford to lose in bankruptcy, this can be a tricky process requiring a lawyer who will help you plan carefully.

Exemptions are designed to allow individuals to get a fresh start. If you are going to start over financially, you need to be able to keep clothes, furniture, a vehicle, and other property. However, your exempt property is limited to certain values and categories. Without the right planning, debtors find themselves losing tax refunds and having bank accounts frozen.

There are categories for exempting cash, equity in real estate, vehicles, household goods, jewelry, certain life insurance policies, and other things, usually limited to a certain dollar amount. Most retirement accounts have higher limits because of federal policy that protects them. What are these limits, and what can you keep? This is not always an easy answer because there are federal and state rules for exemptions. Most states have their own laws that replace the federal exemptions, but another federal rule keeps you from using the rules of your state if you moved there less than two years ago. If you did move, you may or may not have a choice between using the rules of your own state or the federal rules.

In a Chapter 7 case, another issue is the practical question of whether the trustee will abandon your estate. Even if you cannot exempt all your property, the bankruptcy trustee may choose to let you keep it because it is not worth his or her time to sell your nonexempt property and administer your bankruptcy estate. These considerations are different under Chapter 13 because you might make payments in cash to cover the value of property you need to keep. Debtors should seek legal advice to properly state the value of their property, assign exemptions strategically, and evaluate the risks on their nonexempt property. [Edited 2017-08-26.]

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