Bankruptcy is often used as a last resort because it comes with risks and drawbacks. To help minimize risk, laws are in place to protect you while providing creditors with a portion of the debt repayment.
When you file for bankruptcy, you don’t have to give up everything you own. Bankruptcy is a process designed to help people and businesses get a fresh start. However, all assets will be measured and valued and may be used to repay part of the outstanding debt.
What you keep when filing for bankruptcy
Laws have been created to help protect your assets in the event of bankruptcy, called bankruptcy exemptions; however, exemptions vary by process and state.
Your state determines whether you should use your state’s exemptions or whether you can choose federal exemptions. If you live in one of the following states, you can choose either state or federal bankruptcy exemption:
- District of Colombia
- New Hampshire
- New Jersey
- New Mexico
- new York
- Rhode Island
If you don’t live in one of these states, you must follow your state’s bankruptcy exemptions.
Common federal bankruptcy exemptions are listed below. Married couples who file jointly can double the exemption amount and all amounts are shown for files filed after April 1, 2016 and files filed after April 1, 2019. These numbers will be adjusted again on April 1, 2022.
Your main residence could be exempt when filing for bankruptcy if its equity is below the exemption limit. You can protect $ 25,150 in equity at your home under federal exemptions ($ 23,675 in cases filed before April 1, 2019).
The homestead exemption may apply to your primary residence, which can be considered:
- A house or other accommodation
- Personal property used as a residence
Because your vehicle is an asset, creditors can sue it when you file for bankruptcy. However, your vehicle may be counted as an exemption depending on the type of file bankruptcy, whether you own, rent or finance the vehicle and its value. Under federal bankruptcy exemption law, you may be able to exempt a portion of your vehicle’s equity up to $ 4,000.
If your equity exceeds the limit, several things can happen:
- The trustee can sell your vehicle, give you the exempt amount, and use the rest to pay creditors
- The lender can repossess the car if you are behind on your payments
- You can hand over the vehicle, which relieves you of the responsibility for the auto loan after bankruptcy
Personal and household items exemptions
In addition to real estate and your vehicle, personal property may qualify for a bankruptcy exemption. Here are some commonly claimed federal examples personal property exemptions:
- $ 1,700 for jewelry
- $ 2,525 for tools of the trade
- $ 13,400 in total ($ 625 for each item) for household items and furnishings, appliances, clothing, animals, books, crops or musical instruments
- $ 13,400 in accrued interest, dividends or loan value of a life insurance policy
- Health aids prescribed by professionals
Salaries, benefits and exemptions from the retirement account
There are exemptions to protect the money you receive as a benefit, support, or what you have in retirement savings, including:
- Alimony, support or maintenance that you reasonably need for your support
- Life insurance payments you need for support
- All social security benefits, unemployment benefits, war veterans’ allowances, public assistance, and invalidity or sickness benefits
- In most cases, you can keep the proceeds from your retirement accounts up to the maximum aggregate value of $ 1,362,800.
Injury recovery exemptions
Exemptions for the recovery of personal injury include:
- $ 25,150 for personal injury recovery, not including pain and suffering or pecuniary loss
- Compensation for loss of future income necessary for subsistence
- Payment for the wrongful death of a person on whom you depended for support
- Compensation for being a victim of a crime
The generic exemption can be used for any type of property. The exemption is $ 1,325 plus $ 12,575 of any unused portion of your real estate exemption.
Differences between Chapter 7 bankruptcy and Chapter 13 bankruptcy
There is more than one process by which you can file for bankruptcy. The two types that people prefer are Chapter 7 bankruptcy and Chapter 13 bankruptcy. The type of bankruptcy also affects the things that can be kept or taken away from you.
A Chapter 7 bankruptcy allows you to legally pay off, or no longer be responsible for, most of the debts you owed on the date you filed for bankruptcy. This process takes about three months after filing the bankruptcy petition. You could lose some of your belongings by taking this route. If you transferred property before declaring bankruptcy, the transfer may be canceled.
A Chapter 13 bankruptcy allows you to enter into a payment plan to pay off your debt over a period of three to five years. Congress even extended the plan period to seven years, with a few exceptions, due to the covid crisis. This process protects your assets and prevents wage garnishment, and you are able to pay off your unpaid debts through your payment plan. You must make a payment out of your disposable income each month.
Things to do before going through the bankruptcy process
Before going through the bankruptcy process, you may want to consider some factors. In a post for the Oregon State Bar, legal writer Richard Slottee advises:
- Make a list of your monthly income and expenses. It can help you budget.
- Get insurance.Even if you release your debt in bankruptcy, you could easily accumulate new debt if you don’t have medical insurance or auto liability insurance.
- Gather information on your creditors. Make a list of all your creditors, with their addresses and how much you owe them.
- Find out if you are judgment-proof. Some people may be ‘judgment-proof’ in that they may not have property of sufficient value to seize or sufficient income to seize even though their creditors have obtained an order from the government. court against them. Creditors may think it’s not worth suing these people, but you may still want to file for bankruptcy to end their harassment.
- Solve financial problems. If you tend to get into debt, filing for bankruptcy may not be a permanent solution. You can file another Chapter 7 bankruptcy only after eight years. It is best to deal with your financial problems in advance so that you no longer run the risk of bankruptcy.
- Know what debts are not paid with bankruptcy. Certain types of debt are exempt from the protection of bankruptcy law. If you owe child support or spousal support, you cannot escape those responsibilities by going bankrupt. Criminal restitution and criminal fines are also among those debts to which bankruptcy protection does not extend. If you owe personal income taxes, they can only be paid in limited circumstances, and so is your liability for bad checks or fraudulent credit card activity. Student loan debt is also particularly difficult to eliminate.
What creditors can take in bankruptcy
Your âbankruptcy assetâ is made up of all of your income and assets that creditors could potentially obtain. This includes any property you own at the time of filing for bankruptcy, as well as any income you have earned, even if you have not yet received it.
Even some assets that you do not own at the time of filing, such as an inheritance that you are expecting, the proceeds of a divorce settlement or a judgment that you obtained within 180 days of filing for bankruptcy, could be included. to your bankruptcy estate. If you are entitled to a tax refund, this could also go into the pool.
If you transferred, sold, or donated property two to four years before declaring bankruptcy and you did not receive “reasonably equivalent value” in payment, your creditor could also claim that property.
If you paid $ 600 or more in debt to a creditor in the 90 days before you filed for bankruptcy, or paid $ 600 or more to a relative or friend during the one-year period before you filed, your creditor could also claim this amount.
Exemptions for essential goods
The law protects certain essential goods from seizure. For example, these assets can include your car, home, furniture, business tools, and retirement accounts.
There is a dollar limit for such an âexemptâ property, and you will need to follow legal procedures to submit your exemption request. You can either opt for your state’s exemptions, which vary, or the federal exemptions.
If you file for Chapter 13 bankruptcy, all of your assets are usually exempt, as you will pay off your debt on a schedule.
What to know before declaring bankruptcy
Following your bankruptcy filing, your credit will be damaged for a period of 10 years if it is a Chapter 7 bankruptcy and a period of seven years for a Chapter 13 bankruptcy.
Even if you are not legally required to hire a lawyer to handle your bankruptcy, it may be in your best interest to do so. You may even be able to find free legal services.