The fear of losing your home and savings is one of the biggest reasons people wait to file a Chapter 7 bankruptcy petition, often too long, subjecting themselves to more weeks and months of stress and anxiety over creditors’ collection actions and lawsuits.
Pop culture has created an image of bankruptcy leaving you with nothing but the clothes on your back. This couldn’t be further from the truth. This article will outline the exemptions you may be able to apply for to save your property, home equity and even possibly your pension.
How do Bankruptcy Exemptions Work?
When you file a Chapter 7 bankruptcy petition, all of your assets become part of the bankruptcy estate, which the Trustee can seize and sell for the benefit of your creditors. However, your bankruptcy attorney will help you apply “exemptions” to take your assets out of the bankruptcy estate and the grasp of the Trustee.
There are several categories of protected assets that can be subject to exemptions. Personal savings, retirement accounts, equity in your home and car, household goods and lots more can be exempted and protected from liquidation. These protections even stack with those of your spouse if you are married and file bankruptcy jointly! What does this all mean? If you are like most people who file a Chapter 7 bankruptcy petition, you won’t lose anything but your debt!
State vs Federal Exemptions
Each state has a set of exemptions to apply in bankruptcy, and many require that debtors use them. However, there are federal exemptions as well and seventeen states allow debtors to choose which set he or she will apply.
How do you know which set of exemptions to choose? You will make a list of all of your assets and place a value on them; your attorney will then compare your list with the available exemptions and advise which to use.
Applying Exemptions to Your Assets
Be advised that federal bankruptcy exemptions are adjusted every three years on April 1 to reflect changes in the Consumer Price Index. These figures are the April 1, 2022 figures, and exemptions will be adjusted again on April 1, 2022.
Let’s say that married couple John and Jane Debtor files a joint Chapter 7 petition in their home state of Pennsylvania. They are both retired and overburdened with medical and credit card debt from John’s recent illness. He’s feeling much better now and they decide they need a fresh start.
The Debtors own a house worth $300,000 that is mortgaged in the amount of $240,000. They own two older cars outright worth about $2500 each and have a camper worth $2,000. They each have gold wedding bands and John has a watch from his employer for 25 years of service. They each have a 401k and a pension.
Applying Federal Exemptions
Under section 522(d)(1) and (5) the Debtors can exempt $50,300 of the $60,000 equity in their home. They have nothing to be worried about, though – a Trustee will not seize the home with only $9,700 worth of unexempt equity because the cost of sale, often 10-15% of the value of the property, would make it not worth it – the Trustee would lose money.
Under Section 522(d)(2), the Debtors can exempt both cars.
Under Section 522(d)(4), as long as the wedding bands and watch put together are not worth more than $3,400 combined, they are exempt.
The 401k and pensions are wholly exempt in any amount.
The camper… under section 522(d)(5) there is a wildcard exemption ion the amount of $2650. The camper is exempt along with a bit extra that can be applied to the jewelry if necessary.
Applying Pennsylvania Exemptions
There is no “homestead exemption” that can apply to the marital home. However, equity in a residence held in tenancy by the entirely can’t be used to repay the debts of one spouse. This is something for an experienced Pennsylvania bankruptcy lawyer to look into for them.
Pensions are exempted only up to $15,000 per year deposited. Again, the Debtors’ attorney will help them calculate that.
Wild Card exemption – only $600
For the Debtors, on its face, it appears the federal exemptions are more advantageous, but their attorney will go through their assets with a fine-toothed comb and be sure.
Exemptions Save Your Assets and You Get A Fresh Start
Contrary to popular belief, debtors do come out of bankruptcy with their important assets intact and with a discharge of their unsecured debt. If you have unmanageable debt and are concerned that if you file bankruptcy you will lose everything, take advantage of a free consultation with your local bankruptcy attorney and discuss all of your options. You will be glad that you did.
About the Author
Veronica Baxter is a writer, blogger and legal assistant operating out of the greater Philadelphia area.
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