Chapter 7 bankruptcy is an option for debtors who simply cannot pay off their creditors due to any number of circumstances: divorce, job loss, or high medical bills. The common view of people who file for bankruptcy is that they must be deadbeats or living beyond their means, but it's normal people who file for bankruptcy.
Perhaps you qualify for filing under Chapter 7 bankruptcy. You may be wondering if you’ll lose everything in the process. The good news is that some property is exempt from bankruptcy proceedings. There are two lists of possible exemptions: one state, one federal. Most states allow debtors to utilize only state exemptions, but a few states allow the debtor to choose between federal or state exemptions. An attorney may be able to assist you in determining what property your state exempts.
The first, and most common, exemption is known as the “homestead exemption,” and it applies to your residence. The limitations on value of the homestead vary from state to state. For instance, in Texas there is no limit on the value of the homestead. In contrast, the maximum value that can be claimed in Alabama is $5,000.
Some states require special proceedings for spouses who jointly own property. You may also be required to continue making mortgage payments in order to keep the house. Once again, an attorney may be able to help you decide if those requirements apply in your state.
The second most common exemption is the vehicle exemption. Most people will not lose their car, provided its value in equity is below the state exemptions requirement. This value is usually around $3,000, but you need to check your state’s requirements.
In order to calculate the equity of your vehicle, find the market value of the vehicle and then subtract any money owed on it. If the vehicle is worth less than the exemption vehicle, you will probably be permitted to exempt your vehicle from the bankruptcy proceedings. If the vehicle is worth more than the exemption value, it is possible to pay the bankruptcy trustee the amount above the exemption value in order to keep the vehicle.
Like the homestead exemption, if you retain your vehicle, you are required to continue paying any loans or leases on the vehicle.
Other exempted property in Chapter 7 bankruptcy includes household property and appliances, clothing, jewelry up to a certain value, life insurance, alimony and child support, public benefits, retirement plans, and tools that are necessary for the debtor’s trade. For example, a professional musician will not lose her harp in bankruptcy proceedings, even if it is a very expensive musical instrument.
Unexempted property may include stamps, coins, and other collections; cash; bank accounts; stocks, bonds, and other investments; a second vehicle; or a second or vacation home. It is possible to keep a second vehicle, however, if it qualifies under another exemption category, for instance "tools of the trade." For example, if the debtor owns a carpet cleaning business, and needs his company’s van in order to continue doing business. This varies between states as well.
When filing for bankruptcy, the debtor will file a schedule, or list, of all exempted property, including its description, market value, and exemption value. This will allow other parties in your proceedings to review your exemptions and object. However, even if a creditor believes an exemption to be improperly claimed, they have the burden of proof—they can't simply demand you hand over assets.
Bankruptcy can provide relief from a wide array of debts, and despite common myths, very few debtors are left with nothing after they file. Most of all, bankruptcy gives you the chance to move on from debts and start anew.