Our Bankruptcy Attorney Blog

Contrary to the popular view that the primary purpose of Chapter 7 bankruptcy is to wipe away debt after leaving the bankrupt person utterly destitute, in reality the truth is the exact opposite of this suggestion. Namely, the primary purpose of bankruptcy protection is to provide the debtor some respite from the actions of the lenders, especially lawsuits and other measures taken against the debtor’s property. While Chapter 7 bankruptcy does require turning over most unnecessary assets of value to the court – who then liquidates them and pays a portion to the creditors – the entire purpose precludes leaving the debtor an utter pauper. Instead, there are a number of different items – most of which are required to allow the debtor to live and make a living – that are exempt.

Though all bankruptcy cases go to the federal bankruptcy courts, there are actually two tiers of exempt property: one given by the federal government and another given by the state government. The person filing for bankruptcy has to claim his or her exempt property according to either the federal or state standard, however the state standards tend to offer more exempt items than the federal ones (since they are supplemental to the federal exemptions rules); most people end up choosing the state schedule of exempt items. This means they differ, with more conservative states offering little more than the federal exempt properties and more liberal states offering considerably more protection. 

Any item that the debtor wish to protect under exemption has to be listed on the appropriate schedule in the filing paperwork of the petition. Failure to include this schedule, or failure to include some particular item to it, is a common mistake made by people filing their own bankruptcy papers and the result is that the omitted item is not protected from creditors. Although the rules differ per state, in general there are two classes of properties that are frequently exempt from liquidation under Chapter 7 bankruptcy: items needed to live and items needed to make a living.

Items needed to live typically include a portion of the equity in their primary residence, up to a certain amount, which ensures that the debtor’s house cannot be taken from them. Other items in this category include reasonably necessary items such as clothing, household furnishings, household appliances, jewelry (up to a certain value), amounts of cash from public benefits such as welfare, social security, or unemployment; pensions and damages awarded for personal injury.

Items needed to make a living include one (or more) motor vehicles up to a certain value; the tools of the debtor’s trade or profession (usually only up to a certain value), and other items that can be reasonably claimed to be essential for the debtor to earn income. Every state has different requirements in this respect, but the requirements almost always have upper limits on them. That is, typically a debtor cannot claim a car worth $200,000 as their primary means of transportation or a private machine shop as necessary for income if the debtor is in fact a doctor.

Items that are almost always excluded from exemption include: secondary homes or real estate, secondary vehicles (unless more than one person works in the household), recreational vehicles (boats, RVs, motorcycles), valuable collectables, cash and financial instruments not connected to one’s retirement plan, pension, or public assistance, and so on. Being sure to claim everything that can be in any given jurisdiction – and NOT claiming things that should not be – is one of the most important reason to use a bankruptcy attorney when filing.

Tags: bankrupcty

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