If You’re Filing For Bankruptcy, You Can Keep These Things

by Cathy Moran, Esq.

January 28, 2007

Property Exemptions In Bankruptcy

One of the myths that circulates about bankruptcy is that you lose everything you own when you file bankruptcy. Not so!

One of the basic ideas of debtor/creditors rights in this country is that, no matter how much they owe, debtors can retain certain property for basic living or a fresh start. This property is defined in exemptions. That is the property that neither a creditor with a judgment or a bankruptcy trustee can take from the debtor.

Exemptions are also the only issue where bankruptcy rights are different state to state. Congress gave the states the right to substitute their state exemption statutes for the bankruptcy exemptions found in Section 522 of the Bankruptcy Code. Some states opted out of the bankruptcy code exemptions; some states allow their residents to choose between the state exemptions and the bankruptcy code exemptions.

Exemptions are usually expressed in dollar amounts.  The exemption amounts apply to the equity in the asset; if the house, for example, is worth $350,000, but it subject to a $300,000 mortgage, the exemption is applied to the $50,000 in equity. The value that is used is what the particular asset would sell for, today, in the open market, in its present condition.

If property has no equity, then it isn’t necessary to claim it exempt in order to keep the property through bankruptcy.  Also, if the asset  is not “property of the estate”, then no exemption need be claimed since the asset simply isn’t available to creditors in the bankruptcy proceeding.

In addition to the stated exemptions, debtors frequently get to keep more value than the statutory exemption because the cost to the trustee of taking possession of the asset, preparing it for sale, and paying the costs of selling it leaves little or nothing for to distribute to creditors.

Debtors who have assets with more value than can be protected by exemptions frequently elect to file Chapter 13, where they keep all of their assets, and pay their creditors over time what the creditors would have received in a Chapter 7 liquidation.

Image courtesy of Plutor

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Cathy Moran, Esq.

I'm a certified specialist in bankruptcy law (California State Bar Board of Legal Specialization) practicing in the San Francisco Bay Area for more than 30 years. In addition to practicing bankruptcy law, I train new practitioners at Bankruptcy Mastery.

Last modified: May 1, 2011