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The basic premise behind a Chapter 7 bankruptcy is to provide the debtor with relief by discharging his debts and giving him a fresh start, while being fair to those he owes by liquidating his assets and distributing the proceeds to his creditors. Thus, in order to obtain the fresh start, the debtor must give up some of his property to satisfy the claims of his creditors. He doesn’t have to give up everything, however; the bankruptcy code recognizes that in order be able to move forward, the debtor must be able to keep some of his property. Thus, the code provides for property exemptions, which the debtor may claim in order to keep them out of the bankruptcy estate. If property is exempt, then it cannot be used to satisfy the claims of creditors, and the debtor gets to keep it rather than turn it over to the trustee.
The federal bankruptcy code establishes dollar amounts for various property exemptions – for example, a debtor may claim an exemption as to his primary residence for up to $21,165. If the debtor has equity in his home less than this amount, then he may keep his home through the bankruptcy. However, the federal code allows states to opt out of the federal exemption amounts, which about half of the states have done. Thus, the allowable exemptions vary greatly state to state. If a state opts out, then the debtor may only use the applicable state exemptions. If a state does not opt out, then the debtor usually has the choice between using the federal or the state exemptions. In some states, like Florida, the homestead exemption is unlimited. In other states, the limit is a fixed fair market value of the home, ranging anywhere from well below to far beyond the federal homestead exemption amount.
Besides the homestead exemption, there are several other categories of property that a debtor may claim as exempt from the bankruptcy estate. Retirement accounts are largely exempt, allowing debtors to retain their savings. There are automobile exemptions, which allow debtors to keep a vehicle up to a certain amount. To illustrate the way these exemptions work, let’s assume a debtor has a vehicle worth $7000, and the state exemption for automobiles is $5000. The debtor can either turn the car over to the trustee, who will sell it and give the debtor back $5000 with which he can purchase a less expensive car, or if he is able to the debtor may simply pay the trustee the amount above the exemption ($2000) and keep his car.
When the debtor files bankruptcy, he and his attorney prepare a very detailed list of all his assets, as well as income and expenses, called a schedule. The schedule includes a description of each item that the debtor claims as exempt, as well as that item’s fair market value. Creditors may object to an exemption, and often will in an attempt to enlarge the pool of assets from which they will receive their distribution. It is important that a debtor have a skilled and experienced attorney to argue on their behalf in order to secure the exemptions that the debtor is entitled to.
If you are considering filing bankruptcy and want to know more about your options or your next step, please email us or give us a call for a consultation. Our expert bankruptcy attorneys can help you with your fresh start in Hoover, Tuscaloosa, Florence or anywhere in North Alabama. Contact us today at 205-502-2000.