Bankruptcy is the court process in which a debtor’s debts are discharged; meaning, the debtor is no longer legally liable for repaying those debts. Both individuals and businesses may generally file for bankruptcy, and there are different forms of bankruptcy available based on different qualifying criteria. Chapter 7 and Chapter 13 are the two most common forms of bankruptcy.
Very simply put, a Chapter 7 bankruptcy involves the debtor selling some of their possessions and assets in order to repay their creditors. Whatever is eligible and remaining is discharged. A Chapter 13 bankruptcy does not involve any asset liquidation; rather, the debtor works with the court and creditors in order to create a restructuring plan. This reduces the monthly debts to a more manageable amount, which the debtor pays to the creditors.
A bankruptcy exemption is what allows a debtor to retain specific property or assets after bankruptcy has been filed. These exemptions are defined by state statute, and cannot be seized or sold in order to satisfy the debts of the person filing for bankruptcy.
In Chapter 7 bankruptcy, exemptions are used to help determine which property the debtor will keep once the bankruptcy discharge has been granted. This is how bankruptcy exemptions protect the debtor’s property after a bankruptcy. Alternatively, in Chapter 13 bankruptcy, exemptions are used to help determine how much the debtor will have to pay to their unsecured creditors. This can mean the difference between having the repayment plan confirmed, and getting knocked out of Chapter 13.
Federal bankruptcy law allows each state to determine which assets a debtor may keep when a bankruptcy case is filed. A state may allow a debtor to choose between federally-created exemptions, as defined in 11 U.S.C. 522, or state-created exemptions. Or, a state may limit a debtor to the state-created exemptions only. Additionally, a debtor can only use the exemptions from either the federal or the state, but not both. For debtors filing for bankruptcy in states that provide more than one exemption statute or system, they are allowed to use the exemptions from only one statute.
What Are the Bankruptcy Exemptions in Utah?
Some examples of Utah exempt properties as of 2020 include, but may not be limited to:
- Up to $42,700 of the equity in any primary residence, such as a home, mobile home, or any water rights;
- Up to $5,100 in real estate that is not the debtor’s primary residence;
- Various articles of personal property, such as but not limited to:
- Works of art created by a family member;
- Up to $1,000 total in animals, books, and/or musical instruments;
- Burial plots;
- Health aids;
- Enough food to last one year;
- Clothing so long as they are not furs nor jewelry; and
- Education savings plan, up to $200,000.
- Up to $3,000 equity of a motor vehicle;
- Alimony and child support payments;
- Pensions and other similar accounts, as they meet specific criteria;
- Various public benefits, such as crime victims’ compensation and veterans’ benefits;
- Tools of trade, meaning any tools, books, etc that help the debtor earn their living; and
- Various insurance policies and benefits, such as disability benefits.
Utah has opted out of the federal bankruptcy exemptions. What this means is that debtors filing for bankruptcy in Utah must use the aforementioned exemptions, and cannot use the exemptions that are provided by the federal Bankruptcy Code.
According to the Utah Exemptions Act, some equity in the debtor’s home is protected. The debtor would need to file a homestead declaration with the county recorder’s office in order to claim the exemption. It is important to note that in Utah, a debtor cannot use the exemption to protect their property from debts associated with:
- Property taxes or assessments;
- Purchase, such as a mortgage;
- Child support payments; and/or
- Liens allowed by mutual contract.
What Are Some Common Legal Issues with Bankruptcy Exemptions?
There are some common legal issues with bankruptcy exemptions. One of the most common would be bankruptcy exemption limits. An exemption limit applies to any equity the debtor has in property, and limits the amount of equity that is exempt.
Equity refers to the difference between the fair market value of the property, and the unpaid balance on the property. An example of this would be how a home valued at $500,000 with a loan of $450,000 has an equity value of $50,000. If the state’s homestead exemption is $50,000 or greater, the debtor would be exempt from liquidating the $50,000 equity in the home in order to pay off the debts.
Some states allow married couples to double their exemption limits. Utah is one such state. Filing with “head of household” status or having a specific number of dependents can increase some exemption amounts. Some states allow its senior citizens to have a higher exemption limit on homestead, personal property, or other items. Finally, disability can also raise exemption limits, especially in terms of motor vehicles.
What Are the Remedies if I Have a Bankruptcy Exemption Issue in Utah?
If you have a bankruptcy exemption issue in Utah, one of the most common remedies is reworking the property or asset to fit within the exemptions provided by the statute. As Utah does not allow an individual to use federal bankruptcy exemptions, you are still allowed to use federal nonbankruptcy exemptions, such as federal retirement and veteran benefit exemptions.
If an individual wishes to keep property that is not protected by an exemption, the most helpful remedy for exemption issues will always be facilitating a conversation between the debtor filing for bankruptcy and the creditor. If a repayment plan or something else can be worked out on a property or asset that benefits both parties, then that is the main solution to bankruptcy exemption issues.
Individuals and creditors will be able to meet at the Chapter 341 meeting, which during the COVID-19 pandemic is currently occurring via video appearance or telephonically. At that meeting of the creditors, the individual filing for bankruptcy and their attorney will be able to communicate with the creditors, and if necessary reach settlement agreements or repayment plans on certain debts.
Finally, as Utah law does not provide a wildcard bankruptcy exemption similar to other states, it is important that property and assets are prepared ahead of time to ensure that as much property and assets are covered by the stated exemptions as possible. Thus, it is important to begin planning for the bankruptcy process well before filing.
Do I Need a Bankruptcy Lawyer?
If you are in Utah and are considering filing for bankruptcy, you should consult with an experienced and local Utah bankruptcy lawyer. Because state laws vary so widely in regard to bankruptcy and exemptions, it is important that you consult with someone in your area as they will be best suited to understanding your state’s specific laws. An experienced bankruptcy attorney can help you adhere to those laws and navigate how they may affect your specific case, as well as protect your legal rights. A bankruptcy attorney will also be able to represent you in court, as needed.
Bankruptcy attorneys are primarily focused on helping their client through the bankruptcy process, from start to finish. They can help you understand which chapter of bankruptcy you should file for, and what exempt property you should keep. Finally, an attorney will also be able to speak to your creditors on your behalf, and help you settle various debts on property or assets that you may wish to retain.
