Bankruptcy is a serious decision that should be undertaken only with a great deal of thought and planning. However, it is also a legitimate solution to a major financial crisis. Unfortunately, bankruptcy carries a bit of a stigma, which has led to some very common myths and half-truths. One of the most frequently repeated myths is the idea that bankruptcy filers lose everything they own. It is true that in a Chapter 7 bankruptcy, in which the majority of your debts are wiped out, your nonexempt assets can be sold to pay your creditors. However, every state provides exemptions to ensure that debtors are not left out in the cold.
The homestead exemption protects a certain amount of equity in your home during a bankruptcy. The equity is not the full value of your home, but rather the value minus the amount you owe on your mortgage. For example, if your home is valued at $250,000 and you owe the bank $200,000, then your equity is $50,000. Each state has different allowed equity amounts for the homestead exemption, some states allow married couples filing a joint bankruptcy to double the exemption amount, and some states even protect the entire value of your home with no dollar limit.
Like your home, you have a certain amount of equity in your vehicle that is determined by its value minus the amount you owe on your loan. A $25,000 car with a $15,000 loan payoff yields $10,000 in equity. Again, each state provides a maximum equity value that is protected during bankruptcy. In addition, many states offer a wildcard exemption, which is a certain dollar limit of protection that can be applied to your home, car, or personal property.
Personal Property Exemption
Each state also provides an exemption for personal items up to a certain dollar limit. Some states specify what types of items count as personal property, such as cookware and bedroom furniture, while other states allow you to claim anything you own up to the designated limit. A few states allow you to claim all of your property that fits into specific categories, regardless of the dollar value. The wildcard exemption, if available, can also be used to exempt personal property.
Checking and Savings Accounts
The laws that govern cash that is tucked away in checking and savings accounts can be a bit more difficult to understand, because in most states it depends on the source of the funds. For example, your state might protect all funds that come from Social Security, disability pensions, and workers compensation benefits. A portion of the primary wage earner’s wages for a certain number of months might also be exempt. Funds that are held in IRAs, 401Ks, and other retirement accounts are usually exempt, although caps apply to certain types of accounts. In addition, if your state has a wildcard exemption, it can usually be used to protect your financial accounts. Finally, a few states allow a cash in hand exemption of a few hundred dollars.
It is important to understand that even if your home, car, or other property is protected under a bankruptcy exemption, you can lose the item if you default on the loan. Reaffirmation is a process through which you make a new promise to pay your creditor in exchange for keeping your item. The benefit is that you get to keep your property. Should you fall behind in payments later, however, you will face the possibility of losing the item without the benefit of bankruptcy protection. Therefore, you should never reaffirm anything that you are unsure about your ability to continue to pay.
Chapter 13 Bankruptcy
If you have sizeable assets, Chapter 13 bankruptcy might be a better solution for you than Chapter 7. Rather than wiping out your debts, Chapter 13 restructures them. Your payments will be based on your monthly income and expenses, and you may be required to repay only a portion of what you owe. This is generally the best option for debtors who are far behind on car or mortgage payments, and it allows you to keep property that would otherwise be nonexempt.
Filing for bankruptcy is a serious matter, but it is nothing to be afraid of. If you are an honest person caught in a financial crisis, it can be the best way to move on to a financially healthy future. Talk to your lawyer about your options and the exemptions that exist in your state.
If you are ready to take the first steps toward financial freedom, call the Law Offices of David M. Offen today at (215) 625-9600 to schedule your free initial consultation. We’re here to help you every step of the way.