Bankruptcy and Exemptions: What will happen to my house and car?
Bankruptcy and Exemptions
What will happen to my house and car, if I file Bankruptcy?
There are some common topics in consumer law that our clients repeatedly ask us to explain. In an effort to answer some of these common questions for both potential clients and the public at large, we intend to catalog information about them here. Our first effort at doing this is to give a little synopsis on bankruptcy exemptions because they ALWAYS come up in an initial bankruptcy consult. “What are they?” “How do they work?” “If I file for bankruptcy what will happen to my car and my house?” Here it goes:
What Kinds of Property Are Exempt, and How Much?
The bankruptcy process offers consumers who are overwhelmed by their debts a “fresh start” by liquidating some of the debtor’s assets to pay off creditors. When a debtor’s bankruptcy case is closed, however, they will still need basic possessions and assets to move forward. The Bankruptcy Code recognizes these basic needs and provides various property exemptions to protect the possessions and assets that secure those basic needs. If property is exempt, it will not be subject to creditors’ claims, meaning that the amount of the exemption will be retained by the debtor, rather than turned over to creditors in satisfaction of a debt.The type and amount of bankruptcy exemptions varies and is determined under state or federal law. Exemptions used to be based entirely on state law, so your exemptions depended on where you lived (your domicile). The Bankruptcy Code now attempts to achieve more uniformity in exemptions with a set of minimum exemptions, but also allows debtors to choose between exemptions under federal or state law. States were allowed to opt out of this framework and require their citizens to claim exemptions based on state law. Thirty-four states exercised this opt-out or veto power. In these states, the treatment of exemptions looks much like it did before the Bankruptcy Code was enacted. Here in Washington State, for example, debtors may choose between state and federal exemptions when filing for bankruptcy protection. Talk to a bankruptcy lawyer in your area to determine which set of exemptions is best for you.
So what about the House and the Car?
In many cases you will not lose your home or car during your bankruptcy case as long as your equity in the property is fully exempt, meaning that the amount of your exemption is as much or more than the amount of equity you have in the property. Even if your property is not fully exempt, you can keep it if you pay its non-exempt value to creditors in Chapter 13. Some of your creditors may have a “security interest” in your home or automobile. This means that you gave that creditor a mortgage on the home or put your other property up as collateral for the debt. Bankruptcy does not make these security interests go away. We will deal with the issue of secured claims and creditors in a future post.
Bankruptcy and Your Home
The homestead exemption applies to property used as your residence. The federal homestead exemption is currently $21,625. State homestead exemptions vary widely. Before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) was passed, debtors would engage in bankruptcy planning to maximize this exemption. A debtor would move to a state with a generous homestead exemption and shield assets from creditors by buying an expensive home.Under BAPCPA, the State applicable to your exemption is the one that you have resided in for 730 days prior to filing, or if you have resided in more than one state in the past two years, the one that you spent the majority of time in 180 days prior to filing. Washington State limits your homestead exemption to $125,000. Exceptions apply, including the common situation where someone trades up to a more expensive home and transfers equity to the new purchase. The Homestead exemption is also limited if you’ve used it to delay, hinder or defraud a creditor.If your equity isn’t covered by the homestead exemption, it’s possible in a Chapter 7 case that the trustee, who administers your bankruptcy estate, could sell it to raise money to pay your creditors. In that case, you would want to consider filing under Chapter 13, which centers on a repayment plan spanning several years. If you don’t have equity in the home, or it’s within the exemption amount, you can consider keeping it. You’ll still have to pay your mortgage. If you don’t, the lender can seek foreclosure. Again, more on secured claims later.
Bankruptcy and Your Automobile
The Federal Bankruptcy Code exemption for a car or automobile is $3,450. The Washington state exemption for a car used for personal transportation is $2,500. The equity in your car is based on the car’s market value, less any loans against it. If your equity is more than $3,450 (the Federal exemption amount), it’s possible that you can apply the exemption amounts from other categories depending on how you use the car, such as the exemption for tools of the trade. If the trustee sells it, you’re entitled to receive the exemption amount. It’s possible to pay the trustee the amount above the exemption and keep the vehicle. It is also possible, under Chapter 13, to “cram down” the interest rate or principal on a loan for a car that you purchased over 910 prior to the filing.
Other Exemptions
Household Goods and Furnishings
Federal bankruptcy law and state laws provide exemptions for household goods and furnishings. The federal exemption amount is $11,525, and $550 for a particular item. Washington State has a schedule of exemptions covering a variety of household items. However, this type of property usually has little resale value, and the bankruptcy trustee won’t likely view it as a viable source of assets to use to repay creditors.
Retirement Assets
You can exempt retirement funds under § 522(d)(12) of the Bankruptcy Code. The exemption applies to pension, profit sharing and stock bonus plans, employee annuities, Individual Retirement Accounts (IRAs), deferred compensation plans such as your 401(k) account, and certain trusts. The 2005 amendments to the Bankruptcy Code expanded the protection allowed to certain tax-exempt retirement plans that weren’t always protected under former law. This protection is important, as your retirement account balances are probably among the most substantial assets you have. There’s a cap on the amount of exempt funds held in Roth IRAs, but the cap doesn’t impact most debtors.
Talk to a Qualified Bankruptcy Attorney if you have Questions about Exemptions.
A word to the wise: there are always a million qualifications to any one, seemingly straight forward, piece of legal code, and the Bankruptcy Code is no exception. Many situations will affect the amount and number of exemptions you will be able to claim in your property.For instance, you may use your personal automobile in your businesses, or you may share the title to your house with a spouse or co-debtor. For this reason, it is imperative that you discuss these kinds of issues with your attorney before making a decision on whether filing for bankruptcy is the right path for you.
We offer a free consultation.
If you have questions or would like to learn more , please visit our bankruptcy attorney services section. Our attorneys are waiting to assist you. Call us today.