What Property Is Exempt In Bankruptcy
No one wants to lose a car in bankruptcy. Keeping your vehicle in bankruptcy will depend on the following: whether you file for Chapter 7 or Chapter 13 bankruptcy, if youâre behind on your car payment, and whether you can protect all of the vehicle equity with a bankruptcy exemption.
Bankruptcy exemptions determine what you get to keep during and after bankruptcy, including your home, car, retirement account, or personal belongings. But you’ll have to comply with exemption rules. Find out which state exemption laws will apply in your bankruptcy case, or whether you can choose the federal bankruptcy exemptions instead.
If you file for Chapter 7 or Chapter 13 bankruptcy, will you be able to keep your savings, checking, or other bank accounts? The answer depends on what you mean by “keeping.” While most banks won’t close an account in good standing, you’ll have to cover the balance with a bankruptcy exemption. Otherwise, you’ll likely lose it. Other bankruptcy checking and savings account issues include losing funds to setoff and difficulties opening new accounts after a bankruptcy filing.
Kentucky Bankruptcy Exemptions Save Your Home
Every state can use the Federal bankruptcy exemptions. Or it may use its state bankruptcy exemptions. Each state makes the choice of which set of exemptions it wants to use. Along with most other states, Kentucky uses the federal bankruptcy exemptions. Indiana uses the much smaller bankruptcy exemptions found in its state bankruptcy code. Listed below are the Kentucky Bankruptcy Exemptions.
Here are the Indiana state law exemptions. Persons in Indiana often lose tax refunds and bank account funds if they dont have time and plan their bankruptcy in Kentucky. It is very important in Indiana to empty the bank account just before filing. They are limited to just 300 dollars in intangible property, an income tax refund, or a bank account.
States Allowing Federal Bankruptcy Exemptions
These states and the District of Columbia allow debtors to choose between their state system and federal bankruptcy exemptions. If your state isn’t listed, federal exemptions aren’t available. Go to “Bankruptcy ExemptionsWhat Can I Keep When I File for Bankruptcy” and scroll down to the state exemption chart.
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Bankruptcy Exemptions Keep Your Things
One question that I am commonly asked is, Will I lose any of my property or assets if I file a bankruptcy? Almost always, the answer is, No! Youll be able to keep your home, vehicles, and all of your personal property.
Under the Bankruptcy Code, there are many bankruptcy exemptions, which allow people to exempt their home and personal property such as vehicles, home furnishings, clothing, jewelry, and retirement accounts, ect. Exempt assets are not part of the bankruptcy estate therefore, claiming bankruptcy exemptions is a very important part of the bankruptcy case.
Bankruptcy exemptions are found in 11 U.S.C. §522 and can be used by anyone who is qualified to file bankruptcy in a state that allows its residents to use the federal exemptions, or by anyone who doesnt qualify under residency requirements to use state exemptions. Pennsylvania is one of many states that will allow you to use the federal exemptions, if you so choose.
The value allowed under each bankruptcy exemption is updated for inflation every 3 years, ending on April 1. The below-mentioned federal bankruptcy exemptions represent the current dollar amounts that are allowed to be taken for each of the listed types of property.
If you are married and filing jointly, you may double all of the federal bankruptcy exemptions. For example, you may claim a homestead exemption of $47,350 .
All code references are to 11 U.S.C. .
Kentucky Bankruptcy Exemptions And Your Retirement Accounts
In 2020, each person had $27,900 in exemptions to keep their home under the Federal exemptions. In Kentucky, the Federal exemptions include $4,000 for an auto. However, note that Federal exemptions constantly increase with the bi-annual cost of living raises.
When your attorney reviews your Chapter 7 or 13 bankruptcy, he includes information about how property is exempted. Then, if there is an issue, he will inform you.
Interestingly, the Federal retirement exemption is for a reasonable amount. The Kentucky exemption is unlimited. However, I have never seen a trustee take the position with an excessive retirement account.
Because of the cost of retirement, most courts have allowed over one million dollars. See bankruptcy code section 522. Also, if the retirement account has an anti-alienation clause, it is probably not the estates property under § 541.
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Other Dollar Amount Adjustments In The Code
The inflation adjustment also applies to other dollar amounts in the Code, including:
- Priority for wages and employee benefits under Code § 507 will now be $15,150, and the priority for consumer deposits under Code § 507 will be $3,350. Distribution to priority creditors is discussed in NCLCs Consumer Bankruptcy Law and Practice §§ 3.5.4, 18.5.5.
- Debt limits for eligibility for chapter 13 under Code § 109 will also go upto $465,275 in unsecured debt and $1,395,875 in secured debt. The chapter 13 debt limitations are discussed in NCLCs Consumer Bankruptcy Law and Practice § 184.108.40.206.
- Threshold for the presumption of nondischargeability under Code § 523 for purchases of luxury goods or services incurred within 90 days prior to filing will be $800 and for cash advances within 70 days prior to filing will be $1,100. A discussion of when these presumptions arise can be found in NCLCs Consumer Bankruptcy Law and Practice § 220.127.116.11.3.2.
- Dollar amounts under the means test for determining whether a presumption of abuse exists, based on the debtors income after expenses over a 60-month period, will now be: $9,075 or 25% of nonpriority unsecured debt, whichever is greater, or $15,150 . 11 U.S.C. § 707. These dollar amounts are discussed in NCLCs Consumer Bankruptcy Law and Practice § 18.104.22.168.
Why Are There Dollar Limits In The Federal Bankruptcy Exemptions
Exemptions are there to make sure you get a fresh start without having to completely start from scratch once your discharge is entered. For example, the law recognizes that everyone needs a vehicle to get to and from work, grocery shopping, doctorâs appointments, and the like. So, the federal bankruptcy exemptions include a motor vehicle exemption. But, you donât need a $50,000 car you own free and clear to do these things. So, the motor vehicle exemption is limited to a certain dollar amount.
Some federal bankruptcy exemptions have a limit for the category and each item within that category. For example, the federal bankruptcy exemptions allow you to exempt up to $14,875 in household goods, furnishings, appliances, clothes, and books. This is the total amount of value you can retain in this category during your Chapter 7 bankruptcy. But, thereâs also a $700 per item exemption limit. Because, you should be able to keep your coffee pot, but you donât need a $5,000 espresso machine.
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Who Can Use Federal Bankruptcy Exemptions
Currently, the following states allow filers to choose between state and federal bankruptcy exemptions. If your state gives you a choice, you must pick one list or the other. You can’t mix and match items from both lists.
Filers who use state exemptions can also use federal nonbankruptcy exemptions.
The links above will take you to a complete state bankruptcy guide. If you don’t reside in one of these states, you’re limited to your own state’s exemptions, and you’ll find state exemptions here.
Federal Exemptions Not Optional In Ohio
There are bankruptcy exemptions established by federal law but, like most states, Ohio has a list of their own exemptions. Other states may allow you to select which set of exemptions you wish to use in your bankruptcy case. Ohio, however, does not you must use the state exemptions when you file bankruptcy in Ohio.
There also are federal non-bankruptcy exemptions, which protect certain property like military and federal retirement benefits.
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How Do Exempt Properties In Chapter 13 Affect My Repayment Plan
The rule to remember in Chapter 13 is that a Chapter 13 must repay what a Chapter 7 bankruptcy case would repay. Debtors might think if the debtor would have lost a 100,000-dollar truck in Chapter 7, then a Chapter 13 must repay 100,000 dollars.
But this rule does not only look at what the auto is worth. The federal law looks at what Chapter 7 would have repaid from a sale of the asset. If the auction had kept 10% from the sale, it lowers what Chapter 13 must repay by 10%.
Also, the Trustee keeps a portion of the sales of small asset cases up to 25%. After his fees are deducted, Chapter 13 only has to repay 65,000. The car in question will probably sell not for the retail value but the auction price, usually another 30% less than the NADA retail used car value.
This Chapter 13 only has to pay 100,000 minus 30,000 minus another 7,000 for the auction and about 15,000 for the Trustee. The debtor also gets to deduct 4,000 for his auto and personal property exemption. Chapter 13 would only have to repay 44,000 to keep a 100,000-dollar car.
If this is their home and both the husband and wife owned a 100,000 home, their two 27,900 Kentucky homestead exemptions minus the costs of sale and the quick sale value would mean the debtors would be able to keep a home valued at 100,000.
Other Types Of Assets
Real and personal property aren’t the only types of assets protected by the federal bankruptcy exemptions. Federal bankruptcy exemptions also protect so-called intangible assets like IRAs, pension plans, tax-exempt retirement accounts, and cash value life insurance. Income from sources like Social Security, public benefits, veteranâs benefits, alimony, and child support is 100% protected.
A list of other assets protected under the federal bankruptcy exemptions includes:
$14,875 in loan value, accrued dividends, or interest in a life insurance policy
Wrongful death recovery for a person you were a dependent of
Personal injury recovery up to $27,900 not including for pain and suffering or for actual pecuniary loss
Loss of future earnings payments
IRAs and Roth IRAs up to $1,512,350
Crime Victims compensation
Unmatured life insurance policy not including credit life insurance
Disability, unemployment compensation, and illness benefits
Life insurance payments for someone if you were their dependent and relied on them for support
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States That Allow Residents To Use Federal Bankruptcy Exemptions
Depending on what state youâve been living in for at least two years when your case is filed, youâll be able to use either that stateâs exemptions or the federal bankruptcy exemptions, if the state hasnât âopted out.â Currently, the following states allow their residents to use the federal bankruptcy exemptions:
Timing Rules And Bankruptcy Exemption Selection
Some states have significantly more generous bankruptcy exemptions than others. But you can’t move there and immediately use them. To prevent abuse, you must live in the state for at least two yearsotherwise, you’ll use the previous state’s exemptions. Here’s how it works.
If you’ve made your permanent home in your current state for at least two years, you can use the state’s exemptions .
If your domicile hasn’t been in the same state for two years, the rules get more complicated. So prepare yourselfthis is going to sound strange. But we’ll explain it two ways so you’ll know you didn’t read it wrong. Here’s the first way: You’ll choose the state that you lived in the longest during the 180 days immediately before the two years before filing.
Did you get that? Here’s the second explanation, just in case. Count back two-and-a-half years. Then ask yourself where you lived the longest during the first six months of that two-and-a-half-year period.
Still confusing? Let’s try an example. Suppose you planned to file on January 1, 2022. Your two-and-a-half-year period would start July 1, 2019, and you’d qualify to use the exemptions of whichever state you resided in the most during the July 1, 2019, through December 31, 2019 period. You wouldn’t have to file your case there, but you’d use that state’s exemptions. Hopefully, that helps!
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Exemptions Apply To Your Equity In Property
One important thing to remember is that an exemption protects only the “equity” in your property. That’s the difference between the value of the property and what you owe to creditorslike your mortgage lenderwho have a secured interest in it.
If you owe $18,000 on a $20,000 car, you have only $2,000 in equity. If your state has at least a $2,000 exemption for motor vehicles, that will be enough to protect the $20,000 car in bankruptcybut you must continue to make the payments to the secured creditor.On the other hand, if you own the vehicle free and clear, then your equity is the full value of the vehicle, and a $2,000 exemption would not be enough to protect it. The trustee would force the sale of the car, you would get your exemption amount, and the trustee would get the rest of the proceeds to distribute to the unsecured creditors.
To learn what property is exempt in your state, see the Exemptions section of this website.
Yes. Before you file for bankruptcy, you must take a brief credit counseling class and get a certificate proving that you have done so. If you are planning to file jointly with your spouse, you can both attend the same counseling session, but each of you must get a separate certificate. You can usually take a class online or over the phone.
For more information, see the the from the U.S. Department of Justice. When you’re ready to sign up for a counseling class, you can use this list of court-approved credit counselors.
What Happens To Property You Can’t Exempt Using State Or Federal Bankruptcy Exemptions
It will depend on the chapter you file. In Chapter 7 bankruptcy, you lose property not covered by an exemption. The bankruptcy trustee responsible for managing your case will sell the property for the benefit of your creditors. In Chapter 13 bankruptcy, you can keep all of your property however, that luxury comes at a priceliterally. You’ll pay your creditors the value of any property not covered by an exemption in your Chapter 13 repayment plan.
For example, say you own a car outright worth $3,000, and you used the federal bankruptcy exemptions to protect your property. The motor vehicle exemption would cover up to $4,450. Here’s what would happen in each chapter.
- Chapter 7 Bankruptcy. If you file for Chapter 7 bankruptcy, you will get to keep your car because the exemption would protect the equity fully. In the same example, if your vehicle were worth $15,000, the bankruptcy trustee would sell your vehicle, pay you $4,450 for the exemption, deduct sales costs, and distribute whatever remained to unsecured creditors.
- Chapter 13 Bankruptcy. In Chapter 13, you wouldn’t need to pay extra to your creditors through your repayment plan. However, if the car were worth $15,000, you’d need to pay your creditors at least $10,650 through your plan.
Keep in mind that these examples don’t take into account a vehicle loan. You’ll find more information below.
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Business Bankruptcy And Exemptions
Only people can use a bankruptcy exemption. Businesses can use the exemptions. When a company files for bankruptcy, the assets are typically sold for the benefit of the creditors, especially in Chapter 7. Sometimes a business or the business owner can restructure and eliminate unprofitable contracts or divisions by filing a Chapter 7 or 11.
How Do Exemptions Work In Chapter 7 Bankruptcy
Part of the process of filing bankruptcy is accounting for all your property, and listing any property to claim any exemptions. When the value of a property is less than the allowed exemption, you are allowed to keep it. The trustee is allowed to sell any property not covered by an exemption, and use the proceeds to pay your creditors.
Sometimes, however, things can be much more complicated, such as if the exemption only partially covers a property. If you have secured debt like a car payment or mortgage, the creditors lien on the property ensures that creditor gets paid first.
Just to use round numbers, lets assume you have a car worth $10,000, and your outstanding car loan is $8,000. Lets assume you are allowed to exempt $3,775 in vehicle equity. The trustee must pay the lender $8,000, leaving equity of $2,000. The bankruptcy exemption would protect all of the vehicle equity, and the trustee would not sell the car.
In Ohio, the vehicle exemption currently is $3,775. If your car was worth $10,000 but you had a car loan of only $2,000, the trustee could sell your car and distribute the proceeds like following:
- Pay the lender $2,000
- Pay you the $3,775 exemption amount
- Pay sales fees and any costs out of the remaining $4,225 and
- Distribute the remaining funds to other creditors.
Since Ohio has a wildcard exemption, you can use it in addition to the vehicle exemption to protect more vehicle equity.
Our Washington Bankruptcy Exemption Analysis
Washington has some of the largest homestead exemptions in the country, so homeowners will likely fare better using Washington’s exemptions. Filers who don’t own a home will likely protect more property using the federal list because of the higher motor vehicle exemption and the generous wildcard exemption. However, filers who use property in a trade or business should factor in Washington’s $10,000 tools of the trade exemption.
Keep in mind that our Washington bankruptcy exemption analysis is for illustration purposes only and won’t apply in all cases. A bankruptcy lawyer will be in the best position to help you protect your assets in bankruptcy.