Bankruptcy Exemptions: What You Need to Know

Banker Resource
August 1, 2013 — 1,231 views  
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Bankruptcy exemptions differentiate between the items that can be sold and not sold in the market to clear your debts. You cannot discharge your debts by selling items that are exempt. However, there are non-exempt items that can be disposed off to discharge your debts. Additionally bankruptcy laws differ from state to state. 

How Much can be Exempted?

What can be exempted and how much can be exempted are some of the issues that vary from state to state. States will have their own separate bankruptcy laws, and there is also a federal law. While some states offer you a choice between their law and the federal law, there are other states that will make only their law applicable. So, how much or what can be protected depends on the state you live in.    

State as well as the federal laws are liberal enough to allow you to retain a certain quantum of equity and personal property. Under bankruptcy exemptions, there are few states that go to the extent of giving unlimited exemption to homestead. This means you don’t need to sell your home even if it is your free hold property. Clothing and household goods generally fall under bankruptcy exemptions no matter which state you live in.

Parameters for Exemption

The first thing Chapter 7 trustee in bankruptcy looks for is the value of your property. Creditor’s lien is not affected in case of loans against property or vehicles. The proceeds from the sale of the property, equal to the amount loaned, go to the creditor. For instance, a car worth $10,000 with a loan of $5000 will give the trustee only $5000. In other words, there are well defined parameters in bankruptcy exemptions. 

Whether the trustee can sell your car or not depends on a car exemption limit that varies from state to state. If the exemption on your car is $5000 in a state, your trustee may not be able to sell it. But if the exemption is low, they may be able to sell the car, and make a payment to the creditors after paying you the exemption amount. In addition, you may get the benefit of wildcard exemption to protect the property you want to.  

Other Aspects to Consider for Exemption

There are certain important aspects to consider in bankruptcy exemptions. With a few exceptions, as you file bankruptcy under chapter 7, all your property and assets devolve to your bankruptcy state. A trustee is then appointed who has the authority to sell your property, as per law to pay the creditors. However, just because you have filed chapter 7, doesn’t mean all your property will be sold off to pay the creditors. The law makes certain exemptions which protect your property so that you can make a fresh start. There are a number of factors that determine what can be kept and what has to be sold away. In many cases, almost all or most property can be protected by chapter 7 filers.   

A property that is not exempt can still be abandoned by the trustee, that is, it cannot be sold off if its value is only a little more than the exemption. This is because the costs, fees, and commission associated with selling will not permit the payment to the creditors.

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