Real and Personal Property Exemptions in Bankruptcy

One of the first questions that most potential bankrupts have is, "What will happen to my property, if I file for bankruptcy?"

Because the bankruptcy process offers debtors a "fresh start" if they're drowning in debt, to further the goal of a "fresh start" our Bankruptcy Code permits a bankrupt to keep basic possessions and assets going forward.

The assets that a bankrupt can keep so that he or she can truly get a "fresh start" are considered exempt assets under the Bankruptcy Code. These exempt assets will not be subject to creditor claims or the claim of the bankruptcy trustee.

Traditionally, the type and amount of exemptions varied from state to state. So exemptions depended on where you lived at the time of the bankruptcy filing.

Recent amendments to the Bankruptcy Code attempt to achieve more uniformity in exemptions by establishing a set of minimum federal exemptions. In those states which adopted this Bankruptcy Code amendment, if the federal exemptions are more generous than the state exemption, a debtor is allowed to elect exemptions under either federal or state law, but not both.

Most states, however, opted out of this framework and require their citizens to claim exemptions based solely on state law.

Whether under federal or state law, the exemption system permits debtors to retain the means of day- to- day living free from the claims of their creditors. As a result one of the first and foremost items considered exempt are used household goods, furnishings, clothes and personal effects.

A second item of exemption, are cars used for household purposes. Not all cars, mind you. That free and clear Rolls Royce, is not an exempt automobile. The federal exemption for a car is $3,225. This exempt amount refers only the equity in your car based on the car's market value, less any loans against it. If your equity is more than $3,225, it's possible that you could apply exemption amounts from other categories, such as the unused "wild card" exemption. Finally, if the equity in the car is more than the allowed exemption, it is possible to pay the trustee the amount above the exemption and keep the vehicle.

IRA's and other forms of retirement savings are exempt. But can't have $10 million in your IRA and go bankrupt. The 2005 amendments to the Bankruptcy Code set an exemption limit for IRA's for all debtors, regardless of state of residence, to $1million. Pension rights and 401(k) plans, frequently the largest or second largest asset of most families are also safe from creditors and the trustee.

The homestead exemption is another oft used exemption, because it applies to property used as your residence. The federal homestead exemption for cases filed after April 1, 2010 is $21,625. State homestead exemptions vary widely. Before the passage of the Bankruptcy Act debtors would engage in bankruptcy planning to maximize this exemption. A debtor would move to a state with a generous homestead exemption and shield assets from creditors by buying an expensive home.

Current law in the state of California, for example, permits homestead exemptions from as little as $75.000.00 to as much as $175,500.00, where one of the debtors is age 65 or older or suffers from a physical or mental disability.

Payment for pain and suffering, alimony, support, social security, victims reparations, life insurance, unemployment compensation, public assistance or veterans or death benefits are exempt to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.

Recent amendments to the Bankruptcy Act provide that, every three years the federal exemptions are adjusted for inflation. The adjustments for 2010 apply to cases filed on or after April 1,2010. The federal bankruptcy exemptions are currently as follows: Homestead: $21,625, Vehicle: $3,450. Household Goods: $11,525 total with no single item exceeding $550, Jewelry: $1,450, Tools of the Trade: $2,175 and IRA: $1,171,650.

There is also a federal "wild card" exemption of $1,450, plus any unused homestead exemption. In the event that you either do not own a home or have no equity in the home, the wild card exemption could be as much as $23,075.

Before reaching any conclusion on whether bankruptcy is the right answer to the mountain of debt that you are facing, talk to an experienced bankruptcy attorney in your area to determine which set of exemptions applies to you.