Property Exemptions in Bankruptcy
In this article I am going to discuss Schedule C of the bankruptcy petition, which is property exemptions. Under federal and state bankruptcy laws, there are categories and amounts of property that are exempt from the bankruptcy process. This means that you are allowed to keep the property as part of your fresh start after bankruptcy.
For many clients, exemption planning is not an issue because all of your property will fall under the exempt category. For others, we will work with you to identify that property that either falls outside the exemption or closely examine the value of the property. If the value of an item that falls outside the exempt category is not worth the time and expense to liquidate, the trustee may choose to abandon the property. If this happens the ownership of the property reverts back to what it was pre-bankruptcy.
When we prepare the Schedule C, we will compare it to the Schedules A (a listing of real estate/property) and B (personal property) to make sure that nothing has been forgotten in the process. What you will find is that the value of property listed in Schedules A and B are the same as in the Schedule C minus any outstanding loans on the property.
When you have outstanding loans that cannot be avoided through bankruptcy (such as a mortgage), we will only exempt the amount that is over and above the amount that you owe on the house. In this way, we don’t use up exemptions on property that the trustee cannot touch as part of the bankruptcy. For example, if you owe $90,000 on your house and your house is worth $100,000, we will only claim $10,000 as an exemption.
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.
Then and Now
In recent years, things have changed significantly for those filing for bankruptcy in that legislation was passed to raise the exemptions limit, allowing debtors to keep more of their belongings. In the past, there were specific lists of items which were allowed, such as: a bible, a couch, a table with four chairs, a typewriter, a clock radio, etc. Since 2013, however, the limits were changed to not only allow individuals and families to keep more of their belongings but the terms are less specific. Rather than a list of furniture items, you are allowed a certain amount of “household goods,” and “consumer electronic devices.”
The exemption amount for household items has increased from $4,000 per debtor to $6,000. (This means that a married couple can now claim $12,000 in exemptions for their household items.)
Attorneys for debtors championed the bill changing the bankruptcy law; bankruptcy trustees opposed who represent the interests of creditors in a bankruptcy opposed the law. The last time that bankruptcy laws in Arizona were substantively changed was thirty-four years ago, in 1982. The bankruptcy exemptions in Arizona were outdated and did not reflect what people need to be productive.
When the prior bankruptcy exemptions were written for Arizona in 1982, computers (not to mention smart phones, tablets, and other electronics) were not considered by Arizona lawmakers to be a necessary item to have in the home. Now it is hard for many people to imagine functioning without a computer and electronic devices (such as an iPad) in their homes. Many homes are dependent on computers for telephone and other forms of communication that we now consider essential.
Examples of the types of current 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.
Some Different Types of Exemptions
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 $6,000.
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 $6,000 of equity or less in it ($12,000 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 $400. If you have items that you use in your work those are exempt under the “tools of the trade” category up to $5,000. Another category of exemption is health aids. If a professional prescribes the health aid, there is no exemption limit on health aids.
This is a sensitive subject to many people and a question we often hear: Do we get to keep our wedding rings? Before the revision, the law allowed wedding and engagement rings up to $1,000 to be exempt and now that was doubled, allowing up to $2,000 exemption.
You might not even realize that your beloved pet is considered an asset, but it’s true. Currently, the law allows $800 for animals.
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.
Various Other Exemptions
The federal bankruptcy law also allows:
– up to $1,000 for bible, bicycle, sewing mahchine, typewriter, computer, burial plot, rifle, pistol, or shotgun exemption
– up to $150 in watch
– all wrongful death awards
– prepaid rent or security deposit to $2,000 or 1.5 times your rent, whichever is less, in lieu of using homestead exemption
– all teaching supplies for children
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. If for some reason there are oversights in the process of listing your exemptions, including the value, we can easily correct the mistake through an amended Schedule C. The trustee and your creditors will then have 30 days after we file an amended Schedule C to make any objections.
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. Our goal at Trezza and Associates is to give you the information you need throughout your bankruptcy process so that we are able to work as a team. We want you to take full advantage of the relief offered in bankruptcy. It can be a stressful and confusing process, but our experience with thousands of clients means you can rest assured that you have the best representation possible. Call our office to schedule your consultation and learn more about how bankruptcy can help end the financial stress you may be experiencing.