Federal Bankruptcy Exemptions Lawyers

Bankruptcy is the legal process that a person or business initiates when they cannot otherwise meet their financial obligations. Through the bankruptcy process, debtors liquidate their assets or restructure their finances in order to fund or eliminate the debts that they cannot pay. There are many different types of bankruptcy, which are defined and governed under federal law.

What Are the Different Types of Bankruptcy?

As mentioned above, there are many different types of bankruptcy that are governed under federal law. The three main types of bankruptcy in the United States are Chapter 7, 11, and 13 bankruptcy.

Chapter 7 Bankruptcy, which is also commonly referred to as “liquidation bankruptcy,” allows an individual to discharge all of their debts that can be legally discharged. However, there are specific rules that exist regarding who can qualify and initiate Chapter 7 bankruptcy proceedings.

In order to be eligible to file for a Chapter 7 bankruptcy, a debtor’s income must be either equal to or below the median income in their state. Each state will have a different income requirement for filing a Chapter 7 bankruptcy. However, if the debtor’s income is above the requirement for their state, the court may still apply a “means test” based on their previous six months of income, but this is not guaranteed.

Chapter 13 Bankruptcy, also commonly called “wage earner’s bankruptcy,” is a way for debtors to restructure their debts in order to afford payments. Chapter 13 bankruptcy is generally reserved for individuals with incomes higher than their state median, but it may also be utilized by those who wish to keep their property intact.

Under Chapter 13 bankruptcy, some debts are eligible for discharge, while other debts will require full payment through a payment plan. Examples of common payment plans under chapter 13 bankruptcy are anywhere between three and five years.

Chapter 13 bankruptcy differs from Chapter 7 bankruptcy in that the borrower attempts to keep their property and is required to continue making payments on their debts. Similar to Chapter 7, Chapter 13 bankruptcy can also affect an individual’s credit for up to ten years after filing.

The last of the three main bankruptcy forms is Chapter 11 bankruptcy. Chapter 11 bankruptcy is also commonly known as “reorganization bankruptcy” and is a type of bankruptcy that is available to individuals, corporations, and partnerships. Unlike the other forms of bankruptcy, Chapter 11 bankruptcy has no limits on the number of debts that are involved in the bankruptcy process.

As such, Chapter 11 bankruptcy is the most common choice for large businesses that wish to restructure their debts to become profitable again. Additionally, Chapter 11 bankruptcy is generally more expensive to debtors than the other chapters, and the rate of successful business reorganizations under Chapter 11 is generally very low.

What Is a Bankruptcy Exemption?

An exemption in a bankruptcy action allows a debtor to keep certain property or assets out of the bankruptcy process altogether, even after the bankruptcy process has initiated. It is important to note that the exemptions available to persons in the bankruptcy process will be defined by state and federal statute. Exempt property cannot be seized or sold in order to satisfy a bankruptcy petitioner’s debts.

What Bankruptcy Exemptions Are Available Under Federal Law?

The law that outlines the bankruptcy exemptions that are available under the federal law can be found at 11 United States Code (“U.S.C.”) § 522. The following is a list of major bankruptcy exemptions that are available under federal law:

• Homestead Exemption: (i.e., equity in a dwelling used as a residence)
  • Individuals can protect up to $22,975 of equity in their principal residence under federal exemptions.
  • If an individual is married and filing jointly, they may double all of the federal bankruptcy exemptions. For example, they may claim a homestead exemption of $45,950 (which is double the listed homestead exemption amount of $22,975.
• Equity in Automobiles:
  • Individuals can protect up to $3,675 for their motor vehicle.
• Personal Property:
  • Animals, crops, clothing, appliances and furnishings, books, household goods, and musical instruments up to $575 per item, and up to $12,250;
  • Health aids;
  • Any wrongful death recovery for a person the filer depends on;
  • Lost earning payments; and
  • Up to $1,550 in jewelry.
• Tools of the Trade:
  • Up to $2,300 in implements, books, and other tools of the trade.
• Pensions:
  • Up to $1,245,475 in IRAs or Roth IRAs;
  • Unlimited ERISA-qualified benefits that are needed for support;
  • Unlimited 401(k), 403(b), profit-sharing plans, or other tax-exempt accounts.
• Public Benefits:
  • Unlimited amount of unemployment, unlimited amount of workers’ compensation, veteran’s benefits, and social security.
• Alimony and Child Support:
  • Any amount reasonably necessary for the support of the debtor and their dependents.
• Wildcard Exemption:
  • An individual can protect $1,225 of any property, and unused portion of their homestead exemption up to $11,500.

It is important to note that there are also state bankruptcy exemptions that may cover additional property and assets. For example, New York law provides the following is an example of exemptions that a resident may elect in lieu of electing the federal exemptions:

• Homestead Exemption: The homestead exemption in New York is determined by age, marriage status, and the region in which the person lives and is filing.
  • New York allows up to $165,550 for the following NYC counties of Suffolk, Nassau, Putnam, Rockland, Kings, New
  • York, Bronx, Richmond, and Westchester;
  • New York allows up to $131,325 for Albany, Columbia, Dutchess, Orange, Saratoga, and Ulster counties; and
  • New York allows up to $82,775 for all other counties.
• Equity in Automobiles:
  • Up to $4,825 in value, or up to $11,975 if a disabled debtor owns the vehicle.

What Happens to Property Not Covered by an Exemption?

Once again, what happens to property that is not covered by an exemption will depend on the bankruptcy chapter that the filer chooses to initiate bankruptcy proceedings under. In general, a person that files for bankruptcy will keep all exempt property that is covered by a bankruptcy exemption and lose any nonexempt assets if you file for Chapter 7 bankruptcy.

Under Chapter 13 bankruptcy, the plan allows a bankruptcy filer to keep all of their property, but they must pay their creditors for nonexempt assets. Then anything that they do not pay for may be repossessed or sold by creditors to pay their debts.

Are the Federal Bankruptcy Exemptions Used in Every Court?

In short, no, some states do not use federal bankruptcy exemptions. The following is a list of states where residents have the option to use federal exemptions:

Alaska, Arkansas, Connecticut, District of Columbia, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin.

Other states refuse to use the federal bankruptcy exemptions, and instead use their own state exemptions. Additionally, some states allow debtors to choose between federal and state exemptions, which allows the debtors to utilize the exemption list that most benefits them.

Who Can File a Bankruptcy Exemption?

Bankruptcy exemptions can be filed by anyone who files for bankruptcy. Once again, exemptions are available for both Chapter 7 and Chapter 13 bankruptcy filings, but the exact exemptions available to a bankruptcy filer will vary from state to state.

What Is a Bankruptcy Exemption Limit?

It is important to note that exemptions only protect equity in property. A property’s equity is the difference between the fair market value of the property and the remaining unpaid balance. For example, the equity value of a home valued at $500,000 with a remaining loan of $450,000 is $50,000. As such, a debtor would not have to liquidate the equity in their home if their state’s homestead exemption is $50,000 or greater.

In some states, including the states that recognize the federal bankruptcy exemptions, couples can double their exemption limits if they are married. There may also be an increase in exemption amounts if the person files their taxes as a head of household or if they have many dependents. Individuals may also be able to raise your exemption limit if they have a disability, or if they are older.

Do I Need a Lawyer for Help With Federal Bankruptcy Exemptions?

If you are filing for bankruptcy and have any questions about federal bankruptcy exemptions, it may be in your best interests to consult with an experienced bankruptcy lawyer. An experienced bankruptcy attorney can help guide you through the bankruptcy process and help you determine what exemptions are available to you.

An attorney can also represent you at any creditor meeting. An attorney will also be able to help you determine which exemption scheme is the best given your property and assets, as well as which chapter of bankruptcy is best for you. Finally, an attorney can assist you with filing all necessary paperwork and represent you at any other in-person bankruptcy proceedings.