Property Exemptions in Bankruptcy
Property Exemptions in Bankruptcy
The majority of clients we work with in our bankruptcy practice would be considered “consumer” debtors. Credit card debt, home equity loans, car loans, and medical bills often make up the majority of what they owe to creditors. Bankruptcy laws are written to allow consumer debtors to exempt much of the property they have acquired. The ability to retain property is often a major factor in deciding to file bankruptcy. How much property is exempt under the bankruptcy law is also one of the determining factors in deciding whether to file chapter 7 or chapter 13 bankruptcy.
A chapter 7 bankruptcy is much quicker than a chapter 13 bankruptcy. However, if you have large amounts of property that will not be exempt and that would be sold during the chapter 7 bankruptcy, it might be preferable to file chapter 13 instead. However, if the value of your nonexempt property is too high in a chapter 13 bankruptcy, you may not be able to afford the payments that would be required to retain that property.
At the beginning of your bankruptcy case we will decide what property to claim as exempt. The purpose of property exemptions is to allow you to keep and use any property that is essential to daily life. This allows debtors greater possibility of a fresh start after bankruptcy and helps to ensure that they will be able to get back on their feet without the need for assistance. This right to be able to move on with some amount of dignity and self-respect is considered more important under the law than the right of a credit card company to be paid in full for its unsecured loan to you.
Federal bankruptcy laws outline exemptions that can be used when filing. However, states have the right to establish their own property exemptions, to use the federal property exemptions, or to allow the person filing bankruptcy to choose. If filing bankruptcy as an Arizona resident, you will use the applicable state exemptions.
You must have lived in the state for 2 years prior to filing your bankruptcy petition. If you have lived in more than one state over the last 2 years, you must file in the state where you lived for the 6 months prior to filing. If you lived in more than one state during that 6 months, you would choose the state you lived in the longest during that 6-month period.
Examples of the types of exemptions allowed in Arizona follow. Remember that this list is not all-inclusive. When we sit down with clients to discuss their property exemptions, you get a comprehensive overview of what exemptions are allowed for Arizona residents.
Property Exemptions in Bankruptcy
Under Arizona law, if your home has $150,000 or less of equity in it and you have lived in Arizona for the last 2 years you can claim your home as exempt. Your home must be on 2.5 acres of land or less. To determine the equity in your home, take the current market value of your home and subtract what you owe on it.
You will be allowed to keep personal belongings such as furniture, rugs, and appliances up to $4,000. The value of clothing you can keep is $500.
When you are trying to determine the value of your belongings think about the fair market value. So for your clothes exemption, you can keep $500 worth of clothing. The fair market value is not the cost of the clothes when you bought them, but what you would be able to sell the clothing for at a yard sale or on Craigslist, for example.
You are also allowed to keep your car if it has $5,000 of equity or less in it ($10,000 if you have a physical disability). So if you owe $5,000 dollars on your car, but the car is still worth $8,000, you would have $3,000 worth of equity. You would be able to claim your car as an exemption.
Other Items Such as Health Aids, Musical Instruments, “Tools of the Trade”
If you own musical instruments you can keep them up to a value of $250. If you have items that you use in your work those are exempt under the “tools of the trade” category up to $2,500. Another category of exemption is health aids. If a professional prescribes the health aid, there is no exemption limit on health aids.
Disability and Retirement
When needed to reasonably support you and your family, the federal Bankruptcy laws allow you to exempt future Social Security payments, unemployment, welfare, and disability payments. Alimony and child support payments are also exempt when reasonable necessary to support you and your dependents. However, if you are paid more than what would be considered reasonable support, that portion becomes part of the bankruptcy process.
Pensions and Retirement Accounts
If you have retirement accounts that are tax exempt (401, 403, 408, 408A, 414, 457, or 501[a]), we can claim these as exempt without having to prove that they are reasonably necessary to the support of you and your dependents. This would include retirement funds that you may have rolled over into another qualifying fund or account. There is an exception for IRAs. If you have over $1,245,475 in a traditional or Roth IRA that amount over will not be exempt.
Objections to Claimed Exemptions
It is possible for the trustee or one of your creditors to object to any of the property exemptions we claim in your bankruptcy filing. For the most part, objections to exemptions must be filed within 30 days after the end of the meeting of creditors or after filing an amendment to the exemption list. If the objection is not filed before the end of the 30-day period the court cannot consider the objection. There are exceptions to this rule, but for the majority of our clients, those exceptions do not come up. Most often objections to exemptions have to do with a dispute over the value of the property being exempted.
Unless an objection to an exemption is granted, your exemption claims are usually automatic allowed. When we work together to put together your list of exemptions we will work to ensure that we accurately describe the exempt property, including its value and include the basis for the exemption. Once the deadline for objecting to exemptions has passed, you have the right to use or dispose of the exempt property however you may choose.
In our next article we will discuss strategies for planning your exemptions in the bankruptcy process. Similar to strategies for timing of your bankruptcy, it is important that we consider the many protections offered by the bankruptcy laws when preparing to file and claim your exemptions. Our goal is take full legal advantage of the protections under the bankruptcy laws so that you are able to keep as much of your property as possible. With this goal in mind, we help you to move forward from bankruptcy as quickly as possible.
If you are unsure if bankruptcy is right for you, consider setting up a free consultation with our office today. Our experienced attorneys will give you the information you need to make the right decision about bankruptcy.