When considering filing for Chapter 7 bankruptcy, the first thing most people want to know is how much property they are allowed to keep if they file. The answer largely depends on what types of property you have, how much that property is worth, and the bankruptcy "exemptions" that you can use. Read on to learn more about exemptions and the role they play in your Chapter 7 bankruptcy.
(To learn how Chapter 7 works, see our Chapter 7 Bankruptcy area.)
The Role Of Exemptions in Chapter 7 Bankruptcy
When you file a Chapter 7 bankruptcy, almost all of your assets and property become property of the bankruptcy estate (there are a few exceptions). (To learn what property is in your bankruptcy estate, see our Bankruptcy Exemptions area.)
A bankruptcy trustee is appointed and given the authority to sell your assets to pay your creditors. However, filing for bankruptcy does not mean that you have to give all of your property to your creditors.
Exemptions allow you to keep a certain amount of your property so that you can make a fresh start after the bankruptcy. In a Chapter 7 bankruptcy, if you can exempt an asset, the bankruptcy trustee cannot sell it to pay your creditors. How much property you can keep in a Chapter 7 bankruptcy depends on the value of your assets and what your specific exemptions are. Thanks to exemptions, most Chapter 7 filers keep all or most of their property.
How Much Am I Allowed to Exempt?
Each state and the federal system has a set of exemptions. Some states require you to use their own exemptions while others give you a choice between their system and the federal exemptions. This means that the amount of property you can protect in Chapter 7 bankruptcy depends on which state you live in.
The federal system and most states allow you to keep a certain amount of equity in your house and your personal property such as your car or money in the bank. Some states even have an unlimited homestead exemption to let you keep your home even if you own it free and clear. In addition, no matter where you live your household goods and clothing are usually exempt unless they are unusually valuable. (To learn about protecting your home, see The Homestead Exemption in Bankruptcy.)
How Do Exemptions Work In Chapter 7 Bankruptcy?
The Chapter 7 bankruptcy trustee looks at how much value there is in your property when deciding to go after it or not. If you have any loans securing your property such as a car loan or mortgage, the creditor’s lien is not affected by the bankruptcy. This means that the trustee will have to pay the creditor the loan amount from the sale. So, for example, if you have a car worth $10,000 but there is a loan on it for $5,000, then it is only worth $5,000 to the trustee.
In the above example, if you live in a state that has a car exemption of $5,000 or greater, then you don’t have to be concerned about the trustee selling it to pay your creditors. However, if your state only allows a $2,000 car exemption, then the trustee may be able to take your car and sell it. From the proceeds, the trustee will pay you the exemption you are entitled to ($2,000 in this case), subtract the costs of sale and the trustee's commission, and then distribute the rest among your creditors.
Keep in mind that you can also combine certain exemptions to save your property. For example, the federal exemptions system and certain states have a wildcard exemption that can be used to exempt any piece of property. So if your state only had a $2,000 car exemption but also had a $5,000 wildcard exemption, then you can use both of these to exempt the equity in your car up to $7,000 and protect it. (Learn more about the Wildcard Exemption in Bankruptcy.)
When the Trustee Abandons Property
Even if you cannot fully exempt an asset, the trustee may still abandon it (decide not to take it) if its value is only slightly more than your exemption amount. This is because the costs and fees associated with selling the asset will usually eat up the equity in this situation and there won’t be anything left over for creditors. If the trustee abandons the property, you get to keep it.