Filing bankruptcy can be one of the most difficult decisions that a person can make. This is usually a last resort. Most people have tried consolidating their debts or working with their creditors on their own but have been unsuccessful. In the end, bankruptcy is their only saving grace.However, if you are going to file bankruptcy, you need to understand what a bankruptcy exemption is and how it will affect you.
What is Bankruptcy Exemption?
Exemptions are a set of rules or laws that vary based on the state you live in. These exemptions can protect certain property or assets from the creditor. These exemptions can be based on federal laws or, if the state has “opted out” of the federal laws, then the exemptions are based on the state laws in which the debtor resides. Exemptions are based on the equity that an asset holds. This is considered the most authentic and true value of the asset if the asset were sold after satisfying any liens against it.
A good example of how an exemption works is to look at an automobile. If you owned a vehicle and it was valued at $10,000 but there was a loan on the vehicle of $7500 then the vehicles true value would be $2500. In order not to have that vehicle sold and the proceeds used to repay any outstanding debts in the bankruptcy, an exemption may be taken. This may seem like a no-brainer but exemptions can get a little tricky depending on state and federal laws. Where the debtor files bankruptcy, as well as where he lived the two to three years before the bankruptcy, can play a factor in what exemptions can be used.
Chapter 7 and Chapter 13
In a Chapter 7 bankruptcy case, the debtor is allowed to keep the assets that have been exempted. However, they must turn over any non-exempt assets. There is a small catch though. In some cases when the non-exempt property isn’t sufficient to cover all the debts, the bankruptcy trustee can actually take some of the exempt property and sell it to cover the debts. In this case the debtor is still entitled to the exempted value of the property. So if you had vehicle that was valued at $8,000 and the exempted value to you was $3500, when the property is sold, you get the $3500 and the rest is applied towards your debts.
In a Chapter 13 bankruptcy the debtor can pay for his non-exempt debts over a period of time or sell assets to pay for the debts and turn the profits over to the bankruptcy trustee. Being able to keep non-exempt property is one of the key features that often helps debtors decide to file Chapter 13 over Chapter 7 bankruptcy.
Getting Help
Exemptions can be tricky and they have their pros and cons but it is an important thing to understand what a bankruptcy exemption is if bankruptcy is the only option you have left. An experienced and qualified bankruptcy attorney can assist you in making sure that you take advantage of any exemptions owed to you and that you are able to keep more of your property by wisely using exemptions.
