Wednesday, January 21, 2009

Chapter 7 Bankruptcy Exemptions

Federal and state bankruptcy laws reflect the public policy value that no one should be deprived of all of their property. The federal bankruptcy laws, as well as the state laws where you reside, therefore, both allow for certain "exemptions." Federal exemptions are the same for all bankruptcy filers nationwide, while state exemption limits vary from state to state. The debtor may choose whether to use the federal or state exemptions; in general it's best to use the federal exemptions because they are more 'generous' (that is to say, higher).
How your assets will be treated with respect to these exemptions depends on how much 'equity' you have in the property. Equity for all property that is not collateralized (that is, there are no liens against it) is simply the fair market value of the property. Equity for property that does have a lien against it (the most common examples being a house or a vehicle) is calculated simply by subtracting from the fair market value of the property any amounts you owe on loans secured by that property. For example, let's say your house has a fair market value of $200,000, and that you have a first mortgage outstanding balance of $150,000, and a second mortgage (or home equity loan) balance owed of $30,000. Your equity would be calculated as:

Fair market value: $200,000 First mortgage balance: $150,000 Second mortgage balance: $30,000 Total debt secured by home: $180,000

Equity in home: $20,000

Bankruptcy exemptions set a certain dollar limit on the amount of equity that you can have in a specific type of asset. If you have more equity than what the prescribed exemption allows, the bankruptcy trustee may seek permission from the court to 'administer' the property, that is, to sell it in order to distribute the proceeds among your creditors.

And that raises the very important question, what are the exemption limits for the various types of property? To help answer that question, below are listed the federal exemption dollar limits for the most common asset types. Bear in mind, these figures are for a single debtor. To calculate the figures for a married couple (that is, for joint debtors), simply double the dollar amounts indicated:

• Real property $ 20,200 • Vehicle $ 3,225 • Household goods (i.e. clothes, appliances, etc.)$ 10,775 • Jewelry $ 1,350 • Retirement accounts (401K, 403B etc.) unlimited • "Wildcard" $ 1,075*

* There is actually a second, and much larger, "wildcard" exemption available, but it's a function of what amounts the debtor has used in other categories and is therefore a little more complicated to calculate - you'd be well advised to talk to an attorney about this one.

In sum, then, the above should give you at least a rough idea of whether you are within the limits - as far as assets are concerned - for qualifying for a Chapter 7 bankruptcy. If you're not, don't despair - this might just mean that you'll need to consider filing under Chapter 13 instead.

About the Author
David Romito is a Bankruptcy Attorney based in Pittsburgh, PA. He handles Chapter 7 bankruptcy matters in western Pennsylvania. For more answers to your Chapter 7 bankruptcy questions, please visit his website at Bankruptcy Attorney Pittsburgh .