Misconceptions about bankruptcy abound. A major one is that an individual seeking bankruptcy protection is left penniless at the end of the process. Quite the opposite. A person may in fact be penniless when he or she (or they) begins the process but be “penny-full” by the end of it. Let me explain how.
An individual who files bankruptcy, also known as a debtor, is allowed to keep a certain amount of property with which to get a “fresh start” after the bankruptcy case is over. The property that a debtor can keep is called exempt property. In fact, the vast majority of people who file bankruptcy lose nothing – except the debts dragging them down. So, prior to filing, if your debts outweighed your assets, then you were by definition “penniless.” However, after a successful filing, your assets are still there while your debts are gone!
What’s exempt and what’s not is where it becomes complicated. It can make all the difference. In most states, resident debtors must use the exemptions that are defined by their state’s laws, even though bankruptcy is otherwise governed by federal law. In some states, debtors can choose between their state’s exemptions and a different list of exemptions contained in the federal law that governs bankruptcy, known as the Bankruptcy Code. The states that can choose include Alaska, Arkansas, Connecticut, District of Columbia, Hawaii, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, Pennsylvania, Rhode Island, Texas, Vermont, Washington and Wisconsin. If you live in a state not listed here, you must use the state exemptions.
Federal exemptions are adjusted every three years. State specific exemptions and adjustments to them are passed by each individual state. Some of the more basic FEDERAL exemptions are as follows:
Homestead Exemption: $23,675 in equity.
Motor vehicle: $3,775 in equity (one vehicle per spouse)
Household goods: $12,625 ($600 maximum for each individual item)
Tools of the trade: $2,375
Health aids: exempt without regard to value
Unmatured life insurance: exempt without regard to value
Loan value in life insurance: $12,625
Domestic maintenance: amount reasonably necessary for support
Social security, unemployment, veterans benefits, public assistance, disability: exempt without regard to value
Personal injury awards:
- $23,675, except for pain and suffering or actual pecuniary loss
- Loss of future earnings needed for support
- Award for wrongful death of person of whom you were a dependent
Compensation as a crime victim
Retirement Accounts: Tax exempt retirement accounts are exempt without regard to value, except that IRAs and Roth IRAs are capped at $1,283,025.
Education IRA and pre-purchased tuition credits: exempt without regard to value
Spendthrift trust: exempt without regard to value
Wildcard exemption: $1,250, plus $11,850 of any of the homestead exemption you did not use.
The wildcard exemption can be used in a variety of ways to exempt any property you own:
- Cash, bank accounts, shares in a corporation or other investments, or other property not otherwise accounted for in the list.
- It can be used to increase the amount of value exempted in property that is worth more than its specific category will allow.
- It can be used to exempt additional vehicles.
- It can be used to exempt more of other types of property already listed, like jewelry or household goods.
Remember the above are the federal exemptions only! State exemptions vary greatly between state to state. For instance, in New York State the homestead exemption (if you use them – in some cases it’s better to use the federal) was recently increased to $170,825 in certain counties. Double that for a married couple. That’s the amount you can protect when you file a bankruptcy. As you can see, these BANKRUPTCY EXEMPTIONS (which to choose, which to use) are the lifeblood of your fresh start. Effective exemption planning can give the debtor a jump start on their fresh start or, if you are not careful, can actually leave you penniless.
If you are interested in finding out more about bankruptcy law and how best to apply exemptions for a true fresh start, contact our office at 718-539-1100 or email us at firstname.lastname@example.org.