Making the Most of Bankruptcy Exemptions

What will I be able to keep after I file bankruptcy?

This is a common question asked by most people considering bankruptcy as a way out of unmanageable debt. Let's get one myth cleared up right away. Over 90% of people who file for chapter 7 "liquidation" bankruptcy need not lose any of their property. Why? Exemptions, Abandonment and Reaffirmation Agreements. This article will discuss how exemptions work, and how proper planning can make the most of them, but first, let's talk about abandonment and reaffirmation.

Abandonment

Abandonment is a term thrown around in bankruptcy proceedings as a way to say some piece of property is not worth selling, or too difficult for the trustee to sell. In most bankruptcy cases, almost all personal property will be abandoned by the trustee, because it's just not worth the time it takes to raise any significant amount of capital for the creditors benefit.

Reaffirmation

Reaffirming debt is a way to keep some cherished piece of property "out of the bankruptcy", so to speak. Essentially, when a secured debt is reaffirmed, the bankruptcy petitioner is promising to keep on making the monthly payments in return for the right to keep the property.

Reaffirmation of debt should only be used when the allowed exemptions will not cover something of value. Even then, the debt should be negotiated down, especially if there is some unsecured portion which can be eliminated, or "crammed down".

Plan Ahead to Maximize Use of Exemptions

It's up to the individual filer and his/her attorney to make thoughtful, pre-bankruptcy planning effort in order to evaluate all available property and match it up against all available exemptions to make best use of them and keep as mush property as possible.

Make a Checklist

The first step is to itemize all the property that will become part of the bankruptcy estate. This includes real estate and all personal property. Start with the big items like a primary residence, rental and vacation properties, cars/trucks and readily available liquid assets like cash, stocks and bonds. Don't worry about 401k's, IRA's, pensions and other retirement accounts, as those will not be part of the estate available to the bankruptcy trustee.

After those, begin listing all household items including furniture, TV's and other electronics, appliances, clothing and anything else that may be perceived by the trustee to have any value. Even though almost all of these things will probably be abandoned, it's always prudent to plan for the worst.

Sort Your List by Importance

Once you've got a list of all your real and personal property, list the items in order of importance. Obviously, everyone will want to keep their house and their car(s), so those will probably be at the top. Then order your household items by importance and/or value to figure out the ones that should be ensured protection by the available exemptions.

Match Up Your List to the Available Exemptions

Learn about the available exemptions in your state, whether you have the option to use Federal exemptions, and which is best for you. If your state law affords you the right to use the Federal exemptions, you should have two columns next to your list of property; One for State exemptions and one for Federal.

Against each item in your list, figure out if there is a specific exemption protecting it, or whether a general exemption, like "household furnishings" would cover it. Also, find out if your state has an available "wild card" exemption to cover items not protected by specific or general exemptions.

Once you've covered all the property you care about, you are ready to go through the bankruptcy process knowing your bases are covered.

Exemptions and Equity

One thing most people don't realize about large exemptions, like the homestead, or automotive exemptions is that you only have to use them against the positive equity you've got in that property.

For example, suppose you bought a house in 2007 for $250,000, and for the sake of simplicity, you've got an interest only loan against it. If you file for bankruptcy in 2010, and the house is worth only $200,000, you don't have any equity for the trustee to pull out of it. In this case, you wouldn't even need to use your homestead exemption, and you may actually be able to use some of it towards other property instead, to further maximize the property you keep.

The Bottom Line.

Filing for chapter 7 bankruptcy does not mean you are going to lose all of your property, quite the contrary. If you are like most people who file for bankruptcy, you will keep ALL of your property, get rid of ALL of your unsecured credit card debt and personal loans, and get the fresh start that the US Bankruptcy Court promises.

Just make sure to get a good lawyer, plan ahead and get the most that bankruptcy laws have to offer.