Chapter 7 Bankruptcy Exemptions
Don’t think that just because you are filing for bankruptcy you have to give up all of your assets. Under the Bankruptcy Code, you can file for Chapter 7 bankruptcy to prevent creditors from going after specific assets. The property that a debtor is allowed to keep is known as “exempt property.”
When you file your bankruptcy case, you’ll have the option to make a claim for exempt assets. If the court and your debtors do not object to the exemptions, the assets will be certified as exempt property, which means they won’t be a part of your bankruptcy estate and you can keep them once your case is finalized.
How to Keep Your Property In a Chapter 7 Bankruptcy
Most Chapter 7 cases are no-asset cases. This means the debtor is not obligated to give up anything to the trustee. Under the exemption system, debtors can keep the assets they need for day-to-day living. Bankruptcy is supposed to give you a fresh start from your debt, and these exemptions can give you a sense of stability.
What Are the Federal & State Exemptions?
Although Congress has its own exemptions written into the bankruptcy code, each state can elect to use state laws to create exemptions instead. If you want to use the debt exemptions in your state, you will need to have lived there for at least two years before you attempt to file for bankruptcy.
Liens & Bankruptcy Exemptions Explained
Exemption amounts only apply to your equity in a particular asset. If you have co-owned assets, only your portion of the equity can be applied to the exemption you are pursuing.
For example, if one of your assets is your personal residence and it has a mortgage or a lien on it, the totally equity will be equal to the value of the item after the lien amount has been deducted, less the homestead exemption of $15,000.00 in a single case and $30,000.00 in a joint case (assuming both debtors are on the deed and both debtors live at that location). Plus, the cost of selling that asset is taken into account in determining if there is equity in the property.
For example, if we had a joint bankruptcy case and both debtors are on the deed to their personal residence and the home is worth $300,000.00. The cost of selling that home could be up to 10% of the fair market value so $300,000.00 less 10% equals $270,000.00. Then subtract out the $30,000.00 in the homestead exemption and that will reduce it down to $240,000.00 of equity that would be protected. So therefore it is possible that a husband and wife could own a home and it could be worth $300,000.00 and if the principal balance of the mortgage is $240,000.00 or greater then their home would be safe and not liquidated by the trustee.
Please note that some trustee’s cost of sale analysis can vary so it can be as low as 8% to 6%. Most trustees won’t sell your assets if it has slightly more equity than the exemption limit. Trustees will usually only sell your assets if you have enough nonexempt equity to make a substantial payment to your creditors.
Examples of Exemptions
The following is a list of exemptions that are available in most states:
- Homestead Exemption ($15,000.00 in a single case and $30,000.00 in a joint case)
- Auto Exemption ($2400.00 in a single case and $4800.00 in a joint case)
- Wild Card Exemption for Personal Property including cash assets ($4,000.00 in a single case or $8,000.00 in a joint case)
The following assets get 100% exemption protection in a bankruptcy:
- Alimony or Support Payments
- Social Security Benefits (Please note that a large back pay may only be protected prior to it being received – there is debate on this issue regarding its exemption status)
- Disability Benefits
- Veterans Benefits
- 401(k) Plans
- Personal Injury Awards
Consult with a Chicago Bankruptcy Lawyer
At Attorney Joseph P. Doyle, we are dedicated legal professionals who are committed to serving clients throughout Chicago. We know how complicated and frustrating bankruptcy cases can be, which is why we are here to answer your questions and make sure your rights are fully protected. Let us put our skills and experience to work for you today.