What Is Meant By An Exemption In Bankruptcy?
The basic idea is that you should not lose everything you own in a bankruptcy proceeding. You should be allowed to keep clothes, furniture, household goods, retirement investments, a car, perhaps even some cash and a significant amount of home equity. The complete list is too long to include here. In other words, you should not be put out on the street without any property simply because you file for bankruptcy. In Chapter 7 “straight” or “fresh start” bankruptcy, only those items and assets that you don’t really need should be subject to sale by the bankruptcy court trustee to pay money to your creditors. The assets that you are allowed to keep in a bankruptcy filing are those items that you are entitled a “bankruptcy exemption”.
In The Movies, People Lose Everything In Bankruptcy. How Much Will I Lose?
Most people don’t lose their cash, investments, or other property in bankruptcy. Most cases are what are called “no asset” cases in which there is no non-exempt property that can be taken and sold by the bankruptcy trustee. A moving van dispatched by the bankruptcy trustee happens mostly in Hollywood dramas, and does not represent the reality of filing bankruptcy.
Does The Chapter 7 “Fresh Start” Bankruptcy Trustee Really Want To Come And Take My Clothes And Household Furniture?
No. Your used clothing, furniture, and most household items are unlikely to yield any significant amount of money were they to be sold. The bankruptcy trustee is primarily after financial assets like cash, stocks and bonds that are not held in a protected ERISA qualified retirement account. Examples of a protected ERISA qualified retirement account include your 401k, IRA, pension plan, or VIP (Voluntary Investment Plan). This means that you could have many items of clothing and quite a bit of personal property when you file bankruptcy, and have nothing taken away.
Are There Other Types Of Property That The Bankruptcy Trustee Will Attempt To Take From Debtors?
In addition to the unprotected financial assets mentioned above, the Chapter 7 bankruptcy trustee will try to take the proceeds of pending personal injury actions from auto accidents, slipping and falling, dog bites, or medical malpractice/mass tort liability. You may have received a medical malpractice award if you took a bad medication or if you had a medical procedure that wrongfully injured you.
If you are thinking about filing for bankruptcy and also have a significant claim for injury caused by a car wreck, slip and fall, medical malpractice, or some other injury claim, then you should speak with an experienced bankruptcy lawyer. It isn’t that you will necessarily lose your entire award to the bankruptcy court trustee, but the trustee could take a portion of the award, and possibly pressure you to settle your claim quickly.
Why Does The Chapter 7 Trustee Try To Take Away My Personal Injury Winnings Or Other Property?
Money. The Chapter 7 trustee gets a percentage of whatever the trustee collects to pay your creditors. The trustee can also hire himself as his attorney, and can bill hourly against the funds obtained to distribute to your creditors.
Does The Chapter 13 Trustee Serve The Same Role As The Chapter 7 Trustee, And Try To Find Assets To Cash Out Or Sell In Order To Distribute Money To General Unsecured Creditors?
No, not really. The chapter 13 trustee supervises a repayment plan. In general, if you have non-exempt property that you want to keep, then you agree to pay creditors through your Chapter 13 bankruptcy plan an equal value of the non-exempt property, enabling you to keep your assets. You have up to 5 years to complete your Chapter 13 repayment plan.
If you had $10,000 in non-exempt stocks and bonds property that you did not want to liquidate and pay into your bankruptcy plan as a lump sum, then in Chapter 13, you would pay about $209 monthly for 60 months in order to shelter the $10,000 in stocks and bonds from liquidation by the Chapter 13 trustee. This is an illustrative example for purposes of this post. The variables that could apply are too technical to go into here.
What Are Your Thoughts On Bankruptcy Exemptions?
A surprising amount of assets can be sheltered. It is rare that I have a client who “loses” any property or money to a Chapter 7 bankruptcy trustee. I frequently represent clients with higher incomes and more assets. I am very skilled at navigating through Bankruptcy exemptions. I also work hard to remain current on the exemptions allowable in bankruptcy. In some categories of property, the allowable exemptions are small, and in others, they have increased.
For example, until 2007 you could only have up to $40,000 in home equity, and still file for bankruptcy without the chapter 7 bankruptcy trustee asking you to pay in some money to “buy back” your home equity. Functionally, you could have more equity, but this is difficult to explain in a blog post of reasonable length. In 2007, the allowable home equity exemption under Washington law increased to $125,000. At the same time, the allowable non-exempt equity in a motor vehicle under Washington exemptions still stands at only $3,250 per vehicle per person. In other words, a married couple can have two cars and each person can have a net equity value of $3,250. A single person can only have one vehicle with a net equity of $3,250.
In Selecting State Or Federal Exemptions, Which Is Best?
As you might expect, it depends. If you have a large amount of home equity as a Washington resident and you are filing bankruptcy in Washington, then in general you are probably best off under state exemptions. If you don’t own a home, or you have a home either without significant equity or the home is worth less than the mortgage owed on the home, then you might consider filing with Federal exemptions if they are available to you.
Washington is one of only about 15 states in the nation that allows you to select either Federal or state exemptions. This flexibility also makes the selection of exemptions tricky. Among the states that allow the bankruptcy filer to choose the type of exemption for their case, the considerations for making the choice in Washington is unusually complicated compared to the other states.
After Reading This Blog Post, Am I Fully Prepared To File My Own Bankruptcy And Work Through My Own Exemptions?
Absolutely not. This blog post is not legal advice. I wrote it to help you understand an important aspect of bankruptcy, and to help you arrive at your own set of questions that are specific to your circumstances and property ownership status. Bankruptcy law is complex, even for skilled attorneys who have practiced law for an extensive period like myself. You need to retain an experienced, qualified attorney who fully understands the Federal and state of Washington bankruptcy laws to review your exemptions and advise you. In my opinion, you should consult only with attorneys who are members of both NACBA and ABI (National Association of Consumer Bankruptcy Attorneys & the American Bankruptcy Institute). These attorneys are the types who are most likely to care enough about their clients and practice to stay as current and informed as possible. I am a member of both NACBA and ABI.
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