There was a program on TV this week where they disclosed the singer Tony Braxton had to give up her Grammy awards in bankruptcy. That brings up the question – what can you keep? In Chapter 7 bankruptcy, exemptions determine what property you get to keep, whether it be your home, car, pension, personal belongings, or other property. If the property is exempt, you may keep it during and after bankruptcy. If the property is nonexempt, the trustee is entitled to sell it to pay your unsecured creditors.
Bankruptcy exemptions are an important part of the bankruptcy system. In Chapter 7 bankruptcy, exemptions determine what property you get to keep, whether it be your home, car, pension, personal belongings, or other property. If the property is exempt, you may keep it during and after bankruptcy. If the property is nonexempt, the trustee is entitled to sell it to pay your unsecured creditors. In Chapter 13 bankruptcy, exemptions determine how much you will have to pay to nonpriority, unsecured creditors through your Chapter 13 plan.
If you are considering bankruptcy, it’s important to understand how exemptions work and learn what property is exempt in your state. Here’s a primer on exemptions.
Bankruptcy Exemption Systems
Each state has a set of exemptions that apply in bankruptcy. Most states require you to use those state exemptions. However, seventeen states allow debtors to choose between the state exemption system and another set of exemptions created by Congress, called the federal bankruptcy exemptions. California is unique in that it has two sets of state exemptions that debtors may choose from.
If you have a choice of exemption systems, you must choose one system or the other. You cannot mix and match. If you choose to use your state exemption system, you may also use a shortlist of additional exemptions prescribed by federal law, called the federal nonbankruptcy exemptions.
How Bankruptcy Exemptions Work
If you own property worth a certain amount, and that amount is equal to or less than the exemption amount available in your state, you get to keep the property. For example, say you own a car worth $3,000 and your state has a vehicle exemption of up to $5,000. If you file for Chapter 7 bankruptcy, you will get to keep your car. In the same example, if your car is worth $15,000, the bankruptcy trustee will likely sell your car, pay off your car loan with the proceeds, pay you $5,000 for the exemption, and pay the rest to your unsecured creditors.
Keep in mind that the trustee will incur costs in selling your property. So, if your equity in the property is not significantly more than the exemption, the trustee is unlikely to sell the property. For example, if you own a piano worth $2,500 and your state has an exemption for musical instruments in the amount of $2,250, the trustee is unlikely to sell the piano. This is because the costs of moving and selling the piano would probably be greater than $250 – so the trustee would end up with nothing to pay your unsecured creditors.
Carolyn Secor P.A. focuses its practice in the areas of Bankruptcy and Foreclosure Defense in Clearwater, Florida. For more information, go to our web site www.BankruptcyforTampa.com or call 727-335-7151.