Bankruptcy Basics: What Is An Exemption And Why Should You Care?

15 Sep Bankruptcy Basics: What Is An Exemption And Why Should You Care?

Whether sued or in bankruptcy, adebtor is allowed to protect certain property (aka “assets”) or the things that you can say: This is MINE. You protect your property from creditors trying to take it, but there are limits to what you can protect and keep.

The amount of the property you keep depends on the protection available is determined by either federal law (like the Bankruptcy Code) or state law. The right to protect is called an “exemption“. Exemptions can apply to homes, land and real property(real estate), personal property (for example, clothes, car, furniture, dogs, cats), or intangible property (the right to receive payments, a license that has value), depending on where someone lives and what the state has decided about the U.S. Bankruptcy Code exemptions (some states have adopted their own exemption laws and have “opted out” of the federal exemptions).

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 threw an extra twist into the mix for those states with their own exemptions.

It used to be that you just used the exemptions of the state you lived in when you filed, but under the 2005 Act, in order to claim an exemption under state law, for example like my state of Oregon, the debtor must have lived in Oregon for at least 730 days before filing for the bankruptcy in Oregon.

If the debtor has not lived in the state for 730 days, they must use the exemptions of the state where they were living before moving to Oregon, IF they lived there for at least 730 days, OR they might have to use the federal exemptions! If they haven’t been there at least 730 days, they have to use either federal exemptions or some OTHER state’s exemptions!

Well, what if that state says a debtor cannot use their exemptions unless the debtor lives there (and the Debtor remember is now living in Oregon), OR the state has adopted the federal exemptions under the U. S. Bankruptcy Code? Well, the debtor then gets to use the federal exemptions even though residents of Oregon are not allowed to use those exemptions.

If the value of the debtor’s asset(s) is more than the amount provided for in the exemption, the trustee assigned to the case can liquidate (take and sell it or turn it in to cash somehow) and the value that was covered by the exemption gets returned to the debtor. If the item is securing a debt (in other words there is collateral on the debt), the secured creditor also has an interest in the property.

The exemption issue and the new rules are part of the complications that can make a bankruptcy case difficult to handle without an attorney. Picking the wrong exemption in abankruptcycase or relying on the wrong amount can cost a unwary debtor money and/or the loss of assets.

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I'm a consumer protection lawyer in Oregon, working with people in Klamath; Lake; Jackson; Josephine; Curry; and Deschutes County. I speak regularly on bankruptcy and consumer protection issues nationwide.
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