In Bankruptcy Information, consumer law

Hands off!

When a person files bankruptcy, a bankruptcy estate is created. This estate consists of all the property that becomes subject to the control and administration of the bankruptcy trustee. Very little that a debtor owns when she files bankruptcy is not included in the bankruptcy estate. However, some property of the estate cannot be touched by the trustee. That’s because it is exempt.

Exempt property is that property that, by law, is exempt from the claims of creditors. Consequently, it is exempt from the clutches of the trustee. The Bankruptcy Code has a list of exempt property, but the Code also allows states to “opt out” of the Bankruptcy Code exemptions and require debtors in those states to use the state exemptions. Utah is an “opt out” state, so people filing bankruptcy are entitled to claim those exemptions allowed by Utah law.

Some exemptions are absolute, meaning the property is exempt regardless of its value. Examples of these exemptions are personal clothing (except furs and jewelry); refrigerators; freezers; beds; ovens and stoves; microwave ovens; washers and dryers. Most exemptions have some sort of dollar limit. For example, “household goods and furnishings” is a category of exemptions that includes sofas; dining and kitchen tables; chairs; television sets; and other typical home furnishings. To the extent that a home furnishing can’t fit under one of the absolute exemptions, it can be included under the category “household goods and furnishings” and be exempt so long as the total of all property in that category doesn’t exceed $2,000.

Other exemptions exist for specific items, subject to dollar limits. Cars are entitled to a $3,000 exemption. For example, suppose you have a car that is worth $10,000 and it’s paid for. The trustee can sell the car, give you the first $3,000 and use the remainder to pay your creditors. If the car is subject to a lien to a bank, the trustee has to pay the lienholder after he gives you your exemption. So the trustee has to do the math: Value of car minus exemption minus bank loan equals what he can use. If what is left is minimal or less than zero, the car is safe. Suppose the car is worth the same $10,000 but now you still owe the bank $7,000. Value ($10,000) minus exemption ($3,000) minus loan ($7,000) equals zero. The trustee will not sell the car. You still have to pay the bank if you want to keep the car, but at least you know the trustee won’t take it.

Other exemptions include homestead (exemption in your home) of $30,000 per person, or $60,000 per couple; retirement accounts (unlimited except for contributions made in the year prior to filing); social security payments; worker’s compensation awards; money damages for personal injury (not for property damage); firearms (a limit of any three rifle, handgun or shotgun); “tools of the trade” (items used to earn a living, limited to $10,000); pets; books; and works of art depicting the debtor or family members. There are many more.

Exemption planning is one of the most important areas of bankruptcy law and is one of the many reasons you need a good bankruptcy attorney when you file. Just because an exemption exists doesn’t mean you get the benefit of it: you have to know it exists and claim the exemption.  Poor exemption planning can end up costing you thousands of dollars in lost exemptions.

If you need bankruptcy help, contact us.

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