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The policies behind Chapter 7 bankruptcy are to provide the debtor with debt relief and a fresh start by discharging his debts, while maintaining fairness to those he owes by liquidating his assets and distributing the proceeds on a pro rata basis to his creditors. Thus, the get the benefit of the fresh start, the debtor must give up some of his property to satisfy the claims of his creditors. However, he doesn’t have to give up everything he owns; as the bankruptcy code recognizes, there would be little value in a “fresh start” that left the debtor with nothing to his name. Thus, the code allows the debtor to exempt property from the soon-to-be-liquidized bankruptcy estate. If property qualifies as exempt, then it cannot be used to satisfy the claims of creditors, and rather than turn it over to the bankruptcy trustee, the debtor is allowed to keep the property.
The federal bankruptcy code establishes various property exemptions up to certain dollar amounts – for example, a debtor may claim an exemption as to his primary residence for up to $21,165. If the debtor’s equity in his home is less than $21,165, then he may keep his home through the bankruptcy. However, the federal code allows states to opt out of the federal exemption amounts, and half the states have done so thus far. “Homestead exemptions,” like all other property exemption categories, vary greatly state to state. In a state that has “opted out” of the federal exemption scheme, the debtor may only use the applicable state exemptions. If a state has not opted out, then the debtor usually may choose between using the federal or the state exemptions. In some states, the limit is a fixed fair market value of the home, ranging anywhere from well below to far beyond the federal homestead exemption amount. In other states, like Florida, the homestead exemption is unlimited.
Other than the homestead exemption, there are several other categories of property that a debtor may claim as exempt from the bankruptcy estate. Retirement accounts are largely exempt, so that debtors can retain their savings. Note, however, that in some states it can take careful estate planning to guarantee the retirement account survives the bankruptcy. Much depends on whether the account is “qualified,” a legal term that has been the subject of extensive litigation. There are horror stories involving bankruptcy filers who were dismayed to discover that their accounts were liquidated after relying on ill-advised sources. Such stories underscore the necessity of expert counsel to assist you through the process.
There are also automobile exemptions, which allow debtors to keep a vehicle up to a certain dollar amount. By way of illustration, let’s assume a debtor has a vehicle worth $7000, and the state exemption dollar amount for automobiles is $5000. The debtor has two options: either turn the car over to the trustee, who will sell it and give the debtor back $5000 with which he can purchase a less expensive car; or, if he is able, the debtor may pay the trustee the amount by which the value of the car exceeds the exemption dollar amount ($2000) and keep his car.
When the debtor files for bankruptcy relief, his attorney assists him in preparing a very detailed list of all his assets, as well as his income and his expenses. This is called a “schedule.” The schedule includes a description of each item that the debtor claims as exempt, accompanied by each item’s fair market value. Creditors can and often do object to exemptions, in an attempt to enlarge the pool of assets from which they will receive their distribution (the notorious “ten cents on the dollar”). The bankruptcy code is structured to accommodate the competing policies of relief for debtors and fairness to creditors. The code is complex, full of specific rules and exceptions. It is therefore imperative to retain an experienced bankruptcy attorney who can both navigate the code it all its complexity, as well as advance persuasive policy arguments throughout the process. Choosing the right bankruptcy attorney can mean the difference in whether a debtor’s home, valuables, and retirement accounts survive the bankruptcy process.
If you are considering filing bankruptcy and want to know more about your options and the next step, please email us or give us a call at 334-792-1900 for a consultation. Our expert bankruptcy attorneys can help you get your fresh start, and provide the one-on-one attention you need and deserve.