Bankruptcy exemptions or What do you keep if you file bankruptcy?
“Exemptions” are laws that define what property you can keep when you file bankruptcy. All assets will fall into one of the two categories: exempt or unexempt. You want all – or as much as possible – of your assets to be defined as “exempt” because those are the assets you are allowed to keep. Careful and creative exemption planning is one of the most valuable skills an excellent bankruptcy attorney offers. Sometimes, you can change the character of an asset from nonexempt to exempt. Such a strategy is allowed, even encouraged by bankruptcy laws.
Which assets can you keep in Bankruptcy
Some assets more than others are likely to nearly always be exempt. As a general rule, retirement assets such as 401(k) plans, IRA accounts, Social Security Disability, SSA and SSI can’t be garnished by creditors. However, there are exceptions to this rule if the person filing owes student loans. The Department of Education, which guarantees virtually all student loans, has the power to garnish Social Security payments up to 15%.
For many other assets, exemptions can be skillfully applied by your bankruptcy attorney to protect often everything you own.
Understanding what you have and what exemptions can be applied is a very important part of your attorney’s preparation of your case. Most people I interview are inherently honest about these things. Rarely, though, someone will figure that if he/she doesn’t mention an asset she wants to keep, no one will be the wiser. Concealing an asset or concealing income can land you in federal prison for up to five years and can result in a fine of up to $500,000. The smarter plan is to get your attorney to help you plan around the challenge of “excess property.”
What are the different bankruptcy exemptions
There are several different kinds of exemptions. Your first step is to find out which ones may apply to you. Believe it or not, each state has the power to set its own exemptions and those are used in both bankruptcy and nonbankruptcy cases where those exemptions apply. That may seem counterintuitive seeing as how bankruptcy is a federal proceeding, but it’s true. Before October 17, 2005, some people would move from one state to another in order to “exemption shop”, i.e. file their bankruptcy case in the state most generous with its exemptions. All that changed in late 2005.
Chances are that the exemptions of the state where you now live are going to apply to you when you file your case – unless you moved into that state within two years prior to your filing bankruptcy. Then other – and sometimes confusing – rules apply. Since I can’t possibly cover the exemptions of all fifty states and the federal exemptions, I’m going to focus on the California exemptions.
California adds another level of confusion to the mix in that it has TWO different sets of exemptions, and you can only opt for one of them. Usually, it’s pretty obvious to me which set works best for a client. One set – the 703’s – maximizes your ability to keep cash and personal property. Personal property is anything that isn’t “real property”, so it’s a pretty broad definition. It includes but isn’t limited to bank accounts, cars, art, jewelry, guns, intellectual property like copyrights, trademarks, patents, and the list goes on and on. California is famous for its generous “wild card” exemption, which you can apply to anything.
The 704’s maximize your ability to keep the equity in your home – the one you live in as contrasted with rental or investment real estate. They don’t leave much room for cash or for the many other categories of personal property, although retirement vehicles are exempt in much the same manner as under the 703’s.
It’s a sort of common sense thing that people filing bankruptcy aren’t rich and bankruptcy isn’t designed to help the wealthy escape paying debts which they could pay by selling nonexempt assets. The exemption laws define clearly for us just how “rich” one can be and still qualify for bankruptcy relief. Many clients are pleasantly surprised at how generous the exemptions are, especially in California and also under the federal exemptions.