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.

There are very significant differences between these two types of personal bankruptcy. Under chapter 7 of the bankruptcy code, also known as liquidation bankruptcy the filer’s non-exempt assets are liquidated so that his/her creditors can be paid as much as possible before any unsecured debt can be discharged. Under bankruptcy chapter 13, the filer may be granted a debt re-adjustment, typically meaning that his/her debts will be minimized however they must still be repaid.

It’s difficult to determine on your own what the most suitable chapter will be for you, and your circumstances will be unique to your own situation, so comparing your case to others can not guarantee a definite answer. The best thing any consumer can do to figure this out is to consult with a bankruptcy attorney. Most consultations are free and normally require filling out a simple and private online evaluation form. The form you fill out will give the attorney everything they need to perform an evaluation that will not only determine if you qualify for bankruptcy, but which bankruptcy chapter you can file.

Here are some tips that can “give you an idea” of where you might be and how you may qualify for one of these bankruptcy chapters:

Chapter 7 Bankruptcy

You could qualify for chapter 7, normally if you have no income or low income in proportion to your debts. Or if you have few or no assets outside of personal belongings like clothing, home furniture and such. If after paying all your necessary living expenses you have little or no money to pay for your consumer debts, then this could also qualify you for chapter 7 bankruptcy. The thing to understand about chapter 7 primarily is that if you have a large amount of unsecured debt, you could virtually get all of it discharged if you meet the necessary requirements after being evaluated through the bankruptcy means test, which must be done by an attorney.

Also keep in mind that secured debts on the other hand, are not discharged under any chapter, they must continue to be paid for or if the debt is secured against a home or car, they must be surrendered upon discharge.

Chapter 13 Bankruptcy

To qualify for chapter 13, you must have sufficient disposable income. You must be able to prove that you will have enough income to repay the newly adjusted (reduced) debt. Typically you’ll have to come up with a repayment plan that can stretch for up to 5 years, in which you will have paid in full the agreed upon amounts of your chapter 13 repayment plan. Some of the sources you may count as income are your employment income, social security benefits, pension plan payments, wages or commissions from seasonal or contract work, welfare benefits and disability benefits among others.

If you are a business owner, you can not file under chapter 13, instead you must file under chapter 11. You can, however, file under chapter 13 as an individual and you can include business related debts that you may be liable for. Because this complicates things you must consult a bankruptcy attorney for clarification and clear direction if this is your situation.

How should you file your bankruptcy petition?

That all depends on your situation; the best advice that can be given to anyone facing serious financial stress is to take advantage of the free bankruptcy evaluations that are offered by so many bankruptcy law firms and allow an experienced bankruptcy attorney to review your case and advice which not only which bankruptcy chapter is best for you, but give you a clear picture of what you can expect after filing your case.

Please do not conclude from this article that this is a definitive guide for you to determine which bankruptcy chapter to file. This process is a lot more involved and goes beyond what this article can offer. As mentioned before, all cases are different due the unique circumstances that surround each individual.

People file bankruptcy for a lot of reasons, having tons of debt does not automatically qualify you for any specific chapter, other reasons for an individual needing to file bankruptcy include going through a divorce, having suffered a death in the family in which the primary income provider passes on and also having been the victim of identity theft and not being able to resolve the debts with creditors. All these different reasons and the specific circumstances surrounding those issues will have to be analyzed by a professional attorney in order to determine the best route.

If you are still considering filing alone, read an earlier post where I discuss filing bankruptcy alone vs hiring an attorney.