Bankruptcy

Keeping Property Using Bankruptcy Exemptions: You Don't Lose Everything

By Cara O'Neill, Attorney
In bankruptcy, you’ll protect property you need to work and live with bankruptcy exemptions. Nonexempt property—usually luxury items—is either lost in Chapter 7 or kept and paid for through the Chapter 13 repayment plan.

You won’t lose all of your property when you file for bankruptcy. Bankruptcy exemptions allow you to protect property that you’ll need to work and live. Here’s how it works.

When you file for bankruptcy, you relinquish ownership of your property to the bankruptcy court, and it becomes part of what’s known as the bankruptcy “estate.” The bankruptcy trustee—the person responsible for finding funds to pay your bills—holds the property on behalf of your creditors.

Bankruptcy law allows you to “exempt,” or take out of the bankruptcy estate, the things you need to maintain a home and job, such as household furnishings, clothing, and an inexpensive car. You can find out what you’ll be able to keep by checking the exemption statutes in your state.

What Property Is Included in the Bankruptcy Estate?

All of it—without exception. When you file for bankruptcy, you’ll tell the court about your property by listing it on bankruptcy Schedule A/B: Property. The types of property you’ll list will include:

  • real estate (such as a residence, building, or land)
  • vehicles (cars, vans, trucks, tractors, sport utility vehicles, motorcycles, watercraft, aircraft, motorhomes, ATVs, and the like)
  • personal and household items (such as furnishings, electronics, collectibles, sports equipment, firearms, clothes, and jewelry)
  • financial assets (bank, stock, and retirement account balances, business interests, legal claims, tax returns, and other monetary interests)
  • business-related property (any property associated with a business, such as a restaurant oven or merchandise)
  • farm- and commercial fishing-related property, and
  • any other assets you own.

When you account for your property on Schedule A/B, you’ll also include the value of the asset. Not all property values are assessed in the same way, however. For example, you’ll use the “retail replacement value” (the amount of money needed to replace an item of the same age and condition) for household items and the “fair market value” (the price your home would bring on the real estate market) for property.

What Property Can I Protect With Bankruptcy Exemptions?

Each state decides the assets residents can exempt in bankruptcy. Exemptions aren’t automatic, however. You must list the property you’re entitled to exempt on Schedule C: The Property You Claim as Exempt. If you don’t list the property, the trustee will be able to sell it and distribute the proceeds to your creditors.

Your state will likely have an allowance for the following types of exemptions:

  • homestead exemption (some or all of the equity in the home you live in)
  • vehicle exemption (a small amount of equity in a car)
  • household goods and furnishings (furniture, kitchenware, towels, bedding, garden tools)
  • clothing
  • tools of the trade (a reasonable amount for tools you need for your job), and
  • most retirement accounts.

Whether you’re allowed to keep other items, such as the money in your bank account, depends on your state (although most bank balances are not exempt unless you can prove that someone else owns the funds). Some states have a “wildcard” exemption that allows you to exempt any property up to a certain dollar amount.

Where Can I Find State and Federal Bankruptcy Exemptions?

Although most states have one exemption schedule, you might live in a state that allows you to choose between two exemption lists. For example, some states allow you to decide between:

  • federal exemptions, and
  • state exemptions

California, on the other hand, has two state exemption schedules: one that favors filers with equity in a home and another that is more advantageous for people without real estate. A filer must choose one exemption set or the other but cannot pick from both lists.

What Happens to Nonexempt Property?

The fate of your nonexempt property depends on the type of bankruptcy you file.

  • Chapter 7 bankruptcy. If you file for Chapter 7 bankruptcy, the trustee will sell your nonexempt property and distribute the proceeds to your creditors. However, the trustee might let you buy back your motorcycle, boat, or any other nonexempt item if you can afford to do so. You can learn more about exempting property in a Chapter 7 Bankruptcy Exemptions: What Can I Keep? You’ll find answers to specific exemption questions in Chapter 7 exemption FAQ.
  • Chapter 13 bankruptcy. By contrast, you keep all of your property—both exempt and nonexempt—if you file for Chapter 13 bankruptcy. Of course, nothing in life is free. Here’s the catch: You’ll have to pay your unsecured creditors (those whose debt isn’t backed by collateral) an amount equal to your nonexempt property over your three- to five-year repayment plan or your disposable income, whichever is more. So you can expect, at a minimum, that each dollar of nonexempt property you keep will increase the amount you pay into your repayment plan by a dollar.

Because your case is unique, it’s strongly suggested that you meet with a bankruptcy lawyer. A bankruptcy attorney can tell you which chapter will be best for you and what will happen to your property, as well as the cost of filing a Chapter 7 case versus the cost of filing a Chapter 13 matter.

Bankruptcy Court: Complete Bankruptcy Schedules Truthfully

If you’re thinking about ways to get around the system, you’re not alone. Most people want to keep both exempt and nonexempt assets, and might even entertain doing so. Don’t do it.

Simply put, the bankruptcy court is not the place to skirt the rules. Trying to obtain property you’re not entitled to in bankruptcy—whether it be by hiding it, omitting it, or through any other means—constitutes fraud and can result in a fine up to $250,000, imprisonment for up to 20 years, or both.

It’s also not a good idea to assume that you won’t get caught. The bankruptcy trustee will look through your bank statements and the other financial documents you’ll be required to turn over. Plus, there’s an incentive to comb carefully through your schedules. The trustee gets a percentage of any money found for your unsecured creditors (credit card debt, medical bills, personal loans, for instance).

If something appears amiss, property records can be investigated, and inspections of your home, business, storage space, and safe deposit box ordered. If you bend the exemption rules, you can expect the trustee to file an objection and force you to prove that you’re entitled to the exemption in a hearing before the judge.

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