One of the most common misconceptions about bankruptcy is that debtors filing bankruptcy will lose all of their possessions. Nothing could be further from the truth. The good news is that most bankruptcy filers don’t lose any property because many of their assets are exempt.
Bankruptcy Exemptions Explained
In the case of Chapter 7 bankruptcy, a bankruptcy exemption prohibits the bankruptcy trustee from liquidating certain assets. For example, if you have an automobile exemption for $8,000 and your car is worth that or less, your car cannot be liquidated by the trustee. There is a long list of exemptions available in bankruptcy that covers all types of assets, including jewelry, real estate, and cash. Working with a bankruptcy attorney you can determine how exemptions can be maximized for your case.
Chapter 7 vs. Chapter 13 Bankruptcy
Depending on which type of bankruptcy you file, your exemptions will have a different impact on your case. In the case of Chapter 7 bankruptcy, exemptions are used to determine how many assets you get to keep. But in Chapter 13 bankruptcy, exemptions are used, in part, to determine the amount you’ll need to repay to creditors. For example, if you’re using an $8,000 automobile exemption and your car is worth $15,000, you may need to pay the balance ($7,000) to unsecured creditors in your Chapter 13 repayment plan.
Federal vs. State
Every state has its own list of bankruptcy exemptions, but so does the federal system. Each system (federal and state) has different benefits depending on your needs. For example, in some cases, the federal bankruptcy exemption for real estate may be less than your state bankruptcy exemption. In that case, if your state allows it, you may want to use the federal exemptions in your bankruptcy case. However, you cannot mix and match the two; you must choose one set of exemptions—federal or state.
An experienced bankruptcy attorney can analyze your case to determine how you can best use bankruptcy exemptions to protect your assets.