Just about everyone facing financial problems and a possible Bankruptcy filing are concerned with what they get to keep. Many, unfortunately, have visions of someone showing up with a truck and hauling off their furniture, clothing, dishes and other personal items. Thankfully, this could not be further from the truth. In fact, the great majority of people who file for Bankruptcy never lose any property at all in the Bankruptcy case. The Trustee and creditors simply do not want your personal property and household goods unless they have significant value! In this post, we will talk about Exemptions. Simply stated, exemptions are what the law allows you to keep in a Bankruptcy case. They vary from state to state, and Bankruptcy law often allows individuals to use state law exemptions in their Bankruptcy case. You may have heard about people moving to a different state that has more liberal exemption laws, just as people may move to a state with more favorable income taxes. Exemptions typically cover homes, vehicles, furniture and household goods, tools and equipment used for business, retirement accounts and cash. Many states have a “wild card” exemptions that can apply to any property at all. Although, again, very few people lose their personal property in a Bankruptcy case, good exemption planning is a very important part of Bankruptcy planning. Of the few people who do lose property in a case, it is often because of poor pre-filing planning.
One important detail is that exemptions are far more important in a Chapter 7 case, since Chapter 13 generally allows people to keep exempt and unexempt property in exchange for a Chapter 13 payment plan. However, good planning in a Chapter 13 case still includes the possibility of a conversion to Chapter 7. In addition, exemptions cover the person’s (or couple’s) equity in the property, over and above secured debt. Lets look at a quick example. If you are in a Chapter 7 case, own a house worth $200,000 and you owe $150,000 to the lender, it leaves $50,000 in equity. In Georgia, you get to exempt $21,500 of that equity, leaving $28,500 in unexempt equity. Does that mean the Trustee will sell your house to get that unexempt equity? As discussed in this post, it is highly unlikely! If a couple owns the house and both file a Chapter 7 case, they each get to claim the exemption, for a total of $43,000 in exemptions, leaving only $7,000 in unexempt equity. Most people facing financial problems just do not have homes with so much equity that they will lose their house to the Trustee. As mentioned, exemptions vary by state and a few are far more generous than Georgia. For example, in Florida, you can exempt all equity in a home. In California, the exemption starts at $75,000 and can go up to $175,000. Other states are actually lower than Georgia.
Obviously, not everyone owns a home so lets look at another example that does apply to most people- furniture and household goods. In Georgia, the exemption for furniture, household goods and clothing is $5,000 (or $10,000 for a couple). Obviously, many people have accumulated personal items over the years that cost much more than $5-10,000. If you wear suits to work, you may have spent $5,000 in 20 years of clothing hanging in your closet. What is that worth now to a Trustee or creditor? Nothing at all. Furniture has a bit more value in a sale, but even a $2,000 sofa may have a current value of $150 (just think about what you would pay for that used sofa on Craigslist?). Unless you have a large, expensive house furnished with Baker, Henkel Harris or other fine furniture, a Vera Wang wedding dress, or a large silver service, a Trustee does not want your personal property to try to sell at an auction. Chances are slim to none they will even want to look at it.
Do you own a vehicle? The Georgia exemption is $3,500 per person (not per vehicle). Much like a house, the Trustee will only consider a sale of a vehicle with significant equity, over and above the loan payoff, using an auction value.
Are you worried about your retirement account? Most are fully exempt, because our lawmakers understand that taking retirement funds would just shift the burden of taking care of its older citizens to the state or federal government (and we know how efficient that system is!).
Let’s conclude this post with some example of who might lose property to the Bankruptcy Trustee:
- Individuals with significant equity (probably far more than you think) in homes, vehicles or personal property. This might include rental properties, recreational vehicles, boats, and expensive collectibles.
- Expensive jewelry, including engagement rings, watches and other items that have a market for them. Although Trustees do not want to take your engagement ring, they really cannot overlook a $10,000 diamond with an exemption of only $500 (in Georgia). As an aside, when you attend the first meeting of creditors, the Trustee is probably going to check to see if you are wearing expensive jewelry and may ask you about it.
- People who have exempt property, but failed to properly claim the exemptions in their Schedules. One common item that we frequently see, especially at the first of the year, is tax refunds. People will simply overlook that a right to a refund is an asset in the case and must be exempted if significant. In Georgia, the wild card exemption is used for expected tax refunds.
- People who improperly attempt to turn unexempt assets into exempt assets shortly before filing. If you have $25,000 in cash and put that in your retirement account a few days before filing, you have a potential problem. Note that this does not include your regular contributions – just unusual transactions on the even of filing obviously meant to protect the property
A few final notes:
- It bears repeating, very few people lose their homes and personal property in a Bankruptcy case because they do not have sufficient exemptions to cover the property they need for everyday life.
- Exemptions typically do not protect you from foreclosure or repossession of your home or vehicles by the secured lender. You still have to make the payments or make other arrangements with those creditors.
- You cannot just move to another state to take advantage of more favorable exemptions shortly before filing a Bankruptcy case. There is normally a two year waiting period to use your new state’s exemptions. In a few cases, you may be entitled to use more favorable exemptions from your old state if you recently moved.
Finally, this post is just meant to be an overview of exemptions. There is no way to discuss the exemption laws in every state in detail, and in many states the amounts may change annually. As we move forward in this Blog, we will no doubt have many articles about specific exemptions. Exemption planning is one of the most important steps before a case is filed and a good Bankruptcy lawyer often pays for him or herself just by making sure exemptions are properly planned and scheduled. The various legal Q & A websites are full of questions from people who have tried to file on their own and overlooked, for example, their tax refund. The money they lost may very well have paid for a lawyer for the entire case. Do not be one of those people! If you are facing financial difficulties, contact a Georgia Bankruptcy Lawyer, or find a good lawyer in your state.