Exempt vs non-exempt assets

One of the most common doubts for bankruptcy filers is in determining what assets are exempt when filing bankruptcy, this is not always clear especially if there are versified assets involved. As always it is best to consult a bankruptcy attorney to determine this with precision, but this post should give you an idea.

Exempt assets are those that can not be included in the bankruptcy estate, for example your retirement account. 401K, IRA accounts and other retirement accounts are in most states exempt from liquidation, however some states do consider these types of assets non-exempt so it’s important that you check with your attorney to make sure that yours will be safe.

Non-exempt assets are those that will be included in the bankruptcy estate and you must surrender in order to process your bankruptcy discharge. The bankruptcy trustee will use these assets to liquidate them and use the cash proceedings to pay your creditors before any debt can be discharged.

The law currently states that $16,500 of your home’s equity is exempt or double that amount if you’re married. Also you may exempt up to $2,500 of your vehicles total value. Home items like your furniture, items in your wardrobe and home collectibles may be exempt up to a value that can be determined by your attorney since this also varies per state. Any health or medical aids that you need for treatment or life support that are of high value are also exempt.

Any personal injury compensation, and disability payments that you’re receiving may also be exempt depending on which state you’re in.

Other assets like pension plans in which employees contribute to ERISA qualified plans, or deferred compensation plans, health insurance plans and certain annuities can be considered bankruptcy exempt assets.

Education funds to your child’s college education, or state tuition programs that were started at least one year prior to filing for bankruptcy, can be excluded from the bankruptcy estate. These funds educational funds however must clearly have as a beneficiary a child or grandchild of the debtor.

Can I exempt my house entirely?

Typically no, but in today’s crashing real estate market it is difficult to find a home with a significant amount of equity worth liquidating for the bankruptcy trustee. So presently you may be able to keep your house if the trustee is not interested in selling it, but you must continue to pay the mortgage on it even after you get a discharge since this is a secured debt.

If there’s more equity in the home than the allowed exempt amount of $16,500 or double if you’re married, then it is likely that the trustee will move forward with including the property in the estate and sell it. However if the equity is below the allowed amount then you should be fine just make sure you pay the mortgage. Also remember that the lender is not interested in the house, they’d rather you got caught up on payments and will only proceed with foreclosure as a last resort since this is typically an expensive and time consuming effort for the lender.

Can I exempt my vehicle?

Vehicles normally depreciate in value rather quickly, so unless you own luxury or vintage vehicles that hold good value and are above the allowed exemption value of $2500, the trustee will also probably choose to overlook this asset. Most people own vehicles that they’re either leasing or still paying for and because of the depreciation value of most vehicles it is difficult to consider them in the bankruptcy estate as worthy assets. So if your vehicle is a couple of years old with moderate to high mileage you probably have little to worry about.

When can I exempt everything?

If you’re filing chapter 7, more than likely you won’t have to try too hard to exempt certain things you own since most people who file chapter 7 bankruptcy have already exhausted their own resources to get caught up and failed. Including selling some of those assets. In most cases there were never really any assets to begin with. This is why often chapter 7 bankruptcy cases are no-asset-cases, in which the largest if any assets at all are the individual retirement accounts the filers have through their employers. Even if there are assets that can be liquidated they’re often overlooked due to the exempt assets rules.

There will be cases in which the filer has a significant amount of non-exempt assets and there are legal ways of converting non-exempt assets into exempt assets, these circumstances are unique and this will not apply to everyone who has a lot of assets. This can only be done by a seasoned bankruptcy attorney so do not make any assumptions on your own, this can be very serious if it is determined that you tried to purposely defraud or hinder the proceedings. If this is the case for you, then take this very seriously and talk with a bankruptcy attorney because bankrutpcy excemptions are a very important part of the process and most people simply do not have the knowledge to do this correctly.

Should you include your spouse in your bankruptcy petition?

Situations like this are very common, typically one spouse for one reason or another ends up accumulating a mountain of debt or by other circumstances one spouse simply takes on the responsibility of debt alone. Whatever the reason may be for you, it’s probably puzzling you how to go about being married filing bankruptcy alone. It all really depends on who owes what, who owns what and what state you’re in.

Either spouse can file bankruptcy alone in any state, however you have to understand what the laws are in your state as far as how jointly held property is seen. For example California and Nevada are considered community property states. Meaning that in these states whether a married person files alone or with their spouse all community property is considered to be part of the bankruptcy estate, which is liquidated by the bankruptcy trustee to pay creditors before a bankruptcy discharge can be granted.

Typically the filing spouse’s own individual properties or assets will be liquidated first to repay creditors then the non-exempt assets within the community estate will follow. These are properties such as real estate, vehicles and other tangible assets like jewelry and furniture, savings accounts, stocks, and any other assets or earnings that were acquired during the marriage.

States that do not follow community property laws are known as common law states, where only property that is held jointly can be liquidated to pay creditors, if the non-filing spouse holds individual assets he/she does not need to worry about losing anything. Needless to say, community property states certainly complicate the process for any married person needing to file bankruptcy as an individual.

Common mistakes made by individual bankruptcy filers

Once bankruptcy filers become aware of how community property and common law work, they often believe they can get around the system by transferring property to the non-filing spouse or someone else in the family. This is a big mistake and it’s not worth attempting. Should the bankruptcy trustee suspect that to be the case, your bankruptcy file can be seen as fraudulent and all assets may be included in the estate or in other cases the case could be thrown out and the filers may end up paying a fine. Under the new laws, jail sentences are also given if deliberate falsification or fraud is proven. These mistakes are mostly common among pro-se filers, or people who file without a bankruptcy attorney.

Often the non-filing spouse will worry about the effects that bankruptcy will have on their credit. The law states that each individual has a separate credit record and the filing of one spouse should not effect the other. Although it’s also important to consider that debt that is held together, such as mortgages and joint credit card accounts can be an issue. For the non-filing spouse, this could result in negative credit entries if the accounts are in default. This can also mean that the non-filing spouse can now be seen as the person responsible for the debt since the other is under bankruptcy protection.

This is an issue best explained by a bankruptcy attorney, if your case resembles what’s explained here, you should consult a professional at once and get a good and clear picture about how your case will be seen by the bankruptcy court.

You should not pay for a Bankruptcy Consultation, most law offices will give you 30 minutes to an hour of time to explain the process and what you can expect. You can begin your free bankruptcy evaluation here.

Assuming you have exhausted every option and found no clear alternative for bankruptcy, we’ll proceed with walking you through the process of how to file bankruptcy by addressing the two most common ways to do this. First by filing with a bankruptcy attorney and then filing bankruptcy alone.

How to file bankruptcy with an attorney

One way to do this and the most common, is by simply contacting a bankruptcy attorney to prepare your bankruptcy petition and file your case. Your attorney will explain the process of bankruptcy and the terms of his/her representation of you. Some consultations are free and some you have to pay for. It really all depends on the firm’s policies, I would suggest you stick to saving as much as possible so try not to pay for a consultation and make appointments only with firms that don’t charge for this. Bankruptcy consultations should really be free.

Your lawyer will determine which bankruptcy chapter is best for you, based on your financial situation and by completing the BAPCPA’s bankruptcy means test, which helps him determine your eligibility. Write down all your doubts, concerns and questions about the process and when you get the answers write them down also. I would also suggest you seek consultations from at least three firms, shop around because not all bankruptcy attorneys charge the same fees. You’re looking for somebody who’s modest in pricing and who’s also honest and a little sympathetic to your case. To some lawyers you’re just another case number, while others will treat you with a little more respect and dignity.

Once you have got all your information from your attorney, take some time to study it all, and read over the notes you made when you asked questions. Discuss everything with your spouse if you’re married, let it soak, do some more online research on your own and read other people’s posts on bankruptcy blogs and forums.

The fees will vary per law office. Some are as high as $2000, while you may find others that only charge $700. It all depends on where you are in the country. Remember also that just because a lawyer charges a high fee, doesn’t mean that they’ll have the best service. You’ll also need to pay the court’s $299 filing fee if you’re filing bankruptcy chapter 7 or $235 if you’re filing bankruptcy chapter 13. These are fees that the court charges to process your case.

Your attorney will most likely give you a list of things he/she expects you to bring back with you when you’re ready to file bankruptcy. Here’s a quick list:

• Income Tax forms for the last two years
• Income information – current employer, two to three weeks of pay stubs
• Debts spreadsheet – a list of all your current debts including utilities and such.
• Valid identification – Driver’s license, social security card etc.
• Your credit report

Once you’ve provided all this information, your attorney will prepare the bankruptcy petition for you. When that is completed you’ll get a call back to sign your paperwork and then that petition gets submitted to the local bankruptcy court. Prior to your paperwork being submitted you must complete the first part of the credit counseling course required by the court. The second part can be taken after your meeting in court and before your discharge. The credit counseling portion of the process are new implementation of the bankruptcy law changes from Oct of 2005.

One your petition is filed, you’ll be sent an appointment letter for you to show up to court for your hearing, about 30 days from the day of your petition and you’ll be notified in writing with plenty of time about this as well.

During your hearing in court, you’ll meet the bankruptcy trustee assigned to your case. The trustee will examine your case and get a good idea for the reality of your situation. The trustee’s role is to make sure that your file is in order and that all expense reports are accurate and you’re not hiding anything, he also needs to find additional assets that can be liquidated so that your creditors can be paid before you can get a bankruptcy discharge.

You’ll be asked questions by the trustee during this meeting, but don’t get nervous and don’t sweat it, he’s only going over your paperwork and making sure everything you submitted is accurate. It’s not a court room scene from “law and order” it’s just a normal proceeding. Answer honestly and don’t bother providing any additional information outside of what’s being asked. Simply answer the question and wait for the next one.

Unless there is more information the trustee wants to see from you, you won’t need to go back to court again. At that point you can assume that your case is good to go and that it will be discharged. For this to occur another 2 to 3 months may go by if you’re filing bankruptcy chapter 7, otherwise if you’re filing chapter 13 your case can last longer since your repayment plan still needs to be submitted by you and approved. Don’t worry about the time it takes just use this time to save all the money you can and work out a plan of action for what you need to do after your discharge.

Filing Bankruptcy Alone

The procedure will be the same, though filing bankruptcy alone is harder and not recommended. When you file alone the court and the trustee will make the assumption that you have the knowledge to handle the proceedings on your own. If there are inaccuracies in your paperwork it will be your responsibility.

The first thing to do for your process is to download the bankruptcy forms from The US Courts website, these forms come with instructions and you must read these carefully since they also have detailed information on how to file bankruptcy for yourself.

Once you’ve filled out your forms, take the time to sign up for the credit counseling course and take the first part immediately, then you need to gather all your required documentation in the list above and head to court to file your case.

The same thing will happen here where you wait for your appointment letter then head back to court to meet with the bankruptcy trustee about your case. You’ll answer questions in the same fashion. Even when accompanied by a attorney, the questions will only be directed to you and your attorney will participate very little during this time, unless something specific is needed.

Often times when filing bankruptcy alone, you’ll end up returning to court because of something that’s missing from your file, and these are usually important pieces that most people will neglect. The instructions are there to guide you but often people forget or overlook certain things that can cost them to have to return to court or sometimes resubmit their bankruptcy petition again.

Another disadvantage of filing bankruptcy alone is that usually individuals think they can outsmart the bankruptcy trustee, and this is often where things go very wrong. People think they can hide assets or liquidate before filing without anybody knowing about it. This is very risky especially if these are paper assets or registered high valued items like a car or real estate property. That’s why hiring an experienced bankruptcy attorney is the best option, you’ll get all these instructions ahead of time an be advised about what to do and what not to do.

Once you get past the court hearing without any problems, then you should expect to get discharged within the next 2 to 3 months, in which case you should complete the second part of the credit counseling and be done with it.

You’ll receive your bankruptcy discharge via mail, when that arrives keep it somewhere safe and make sure you make copies to submit to any creditor that tries to collect afterwards, they may try, so keep your bankruptcy records in order and your discharge papers ready to present in case that happens to you.

Typically for pro-se filers (self filers) it is most adequate to file bankruptcy alone when there are no assets to liquidate and the filer is mostly burdened by unsecured debt like credit cards. In cases like this you would mostly likely file for bankruptcy chapter 7 and even if you don’t know much about how to file bankruptcy, you can, in most cases, handle your own file if you take the time to read the bankruptcy laws that apply to you. If you’re filing chapter 13 or a restructuring of your debts, this process will be awfully complicated and you should consult a bankruptcy attorney to handle your case.

The only other thing to do now is start all over, by monitoring yourself constantly and making the commitment that this will not happen to you again, many times people hear that this is not their fault and they take that to heart making them selves feel as the victims of debt. Unless you suffered unforeseen incidents such as identity theft, divorce or a death in the family, you have to realize that you were driving all along so take account of your previous actions and make sure you make a positive change.

Knowing how to prepare for bankruptcy is going to make it a smoother process and since you’re the one brewing the storm you need to do some planning before and during the process of your petition. This will have a huge impact on your life afterwards so you should prepare as soon as you begin thinking that filing bankruptcy is an option for you.

One way to prepare for bankruptcy is to ask yourself if you’ll be secure in your present job if you file. People who work in government programs that require security clearances will need to consider this factor very carefully. This event must be reported to your employer’s security center as required by the government for individuals holding a security clearance. The U.S. government will run an investigation on your case to determine whether you can keep your clearance or not, so in this case filing bankruptcy needs to be considered carefully. Even if you work for a commercial employer, find out what their requirements are for reporting life changing events such as bankruptcy. If you don’t have a job, you should do your best to get employed before you file your petition, since more employers are now doing credit and background checks on their applicants before hiring.

If you’re married, if at all possible, try to file alone, if both you and your spouse file together you will both suffer the same consequences afterwards. If only one of you files then at least you got the other to be the face of good credit for both of you. This can be more challenging especially if you have joint accounts, and if both your names are on the house and car titles. These are typically all known as community properties and are considered to be part of the bankruptcy estate, this is not the case in every state. You will want to consult with a professional on this point to see if it is possible in your case.

Stop using your credit cards at least 90 days before you file. This is a very important point especially if you’re filing bankruptcy chapter 7 in which unsecured debts like credit card balances are discharged completely. Having a history of continuous use of your credit cards will make the bankruptcy trustee want to investigate the charges you made in more detail to determine if you’re really eligible to file. Your credit purchases should not reflect anything that’s not considered a necessity. So do not make the mistake of making luxury type purchases with your cards, to include TVs, stereo systems or any type of expensive gadgets. Remember your transaction history will be reviewed by the bankruptcy trustee and these types of purchases will make it hard to pass that you’re truly in financial hardship. Necessities such as food, utilities and medical expenses can be acceptable, but don’t over do it.

When your bankruptcy case is filed, make sure you take advantage of the benefit of not having to pay your creditors and put this money away in a money market account. Your creditors will be expecting you to continue to make payments but legally they can not pursue this if you’re in the process of filing bankruptcy, this is called the automatic stay. Saving this money will prepare you for what’s to come after bankruptcy and you’ll be glad you did. The process can last for up to 3 months for bankruptcy chapter 7 from the time you file, so save that money, this is not the time to live it up. The process can last several months for bankruptcy chapter 13 while your repayment plan is reviewed and accepted.

Also do not transfer your savings account or any other assets to any of your relatives, and try to pass it as payment for a loan you owed them. All of this will be investigated during the bankruptcy process and the trustee will find out, and when he does find out, the trustee can sue to get that money back and repay your creditors. You must understand that the bankruptcy trustee’s role is to look after the interest of the creditors not yours. So the trustee is concerned with making sure you are being honest and that your creditors get paid with the proceeds of any assets that can be liquidated if you’re filing chapter 7 or mediating a fair repayment plan if you’re filing chapter 13, if you try to hide your assets you will most likely get caught.

On that same note, you should also not make any large donations either in cash, jewelry or any other valuables. This is another question you’ll be asked and it can look suspicious if the donations were made to people you know and/or the items donated were high valued items that could have been listed as assets.

Consider other options, there are alternatives to bankruptcy and they’re not always obvious, so take a look at the alternatives post to find out some options. Only once you have exhausted all options or see no feasible alternative to bankruptcy then you should proceed with your case. Also remember to take advantage of a free bankruptcy evaluation, many bankruptcy law firms offer free consultations and even if you don’t file with them you’ll gather great information about the process and a definite idea about the costs.