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WHO CAN KEEP PROPERTY IN A CHAPTER 7 BANKRUPTCY?
When filing a chapter 7 bankruptcy, understanding how exemptions work is important. Debtors are allowed to keep exempt assets. Debtors lose non-exempt assets in a chapter 7 bankruptcy, so it is important to know whether an asset is exempt from bankruptcy or it is not.
The bankruptcy code allows an individual debtor to exempt real, personal, or intangible property from being sold in bankruptcy. Real property is another name for real estate. Examples of personal property can be money, cars, clothing, jewelry or household furniture. Intangible property can include the goodwill of a business. What is important to understand is that a lot of different types of property can be classified as exempt when filing bankruptcy.
List and Describe ALL Assets
Under bankruptcy law, debtors are required to list ALL of their assets in their bankruptcy paperwork. Debtors are required to declare whether an asset is exempt, and the amount an asset is exempt.
Home Exemption Example:
For example, let’s say a homeowner lives in a home worth $100,000. She has a mortgage with $50,000 left to be paid. If the homeowner were to sell the home (with no costs), she would pocket $50,000 after paying off the Mortgage. Therefore, the homeowner has $50,000 in home equity.
If the homeowner would have to file a chapter 7 bankruptcy, she would need to describe in the paperwork the home address, the fair market value, and the amount owed on the mortgage.
Next, the debtor will then need to declare whether the home equity is exempt. The amount afforded in home exemptions is NOT set. It is different from state-to-state. It can change depending on the debtors’ age and marital status. It can also differ by which set of exemption laws a debtor chooses. For example, in California, debtors can choose from two separate sets of California exemption laws.
Debtors need to determine how much they can claim BEFORE filing bankruptcy. This should be done with a qualified bankruptcy attorney. A mistake in the amount of exemption permitted by the law could cause the home to be sold.
California also prescribes exemptions for other assets. Generally speaking, qualified retirement accounts are fully exempt. Debtors can claim exemptions for equity in cars, household items, and tools of the trade, to name a few of the popular exemptions.
Wild Card Exemption:
In California, debtors can SOMETIMES add exemption credits to cover extra equity in particular asset categories if a debtor runs out. Here is a general description of how it works:
Let's say a debtor is an auto mechanic. He owns $10,000 in "tools of the trade". Let’s assume that the exemption law where he lives – after working with qualified bankruptcy attorney, right? -- determine he is allowed to exempt up to $7000 of his tools. That means $7,000 of the tools are protected and $3,000 worth of the tools are not protected (non-exempt). The bankruptcy trustee would have every right and a duty to seize and sell the $3000 worth of tools for the benefit of the creditors. By using the "wild card" exemption, the debtor can apply extra exemption money and declare the $3,000 as exempt.
|Flickr: Tim Pierce|
This California exemption is the “Wild Card” exemption. It gets its name from the poker card game. Have you ever played poker, calling out “deuces wild” or “Jokers wild”? "Jokers wild" in a card game means that you can turn a Joker into another card to help your hand of cards out.
As you can see, deciding which assets are exempt and how and how a debtor can claim an asset as exempt from the bankruptcy estate can be one of the more important and difficult aspects of his bankruptcy case. A mistake can cause an asset to be sold to pay creditors. It is extremely important to consult an attorney if the debtor has any questions regarding the issue of exempt assets.