If you file for a “debt liquidation” bankruptcy under Chapter 7 of the United States Bankruptcy Code, the Trustee has an economic incentive in selling assets for the benefit of creditors. But the Trustee cannot just take what they want. In the vast majority of cases, you can keep all of your property in a bankruptcy. There are exemptions, or protections, that you can place on your property so that the Trustee cannot touch them and you can keep them. Even if you file for a “debt repayment” bankruptcy under Chapter 13, the exemptions still play a significant role in what percentage of the debt you have to repay to your creditors. There are various types of exemptions you can use for different kinds of property. This is Part 1 of a two-part article to give you an overview of some of the main exemptions and what they cover.
There is a “real property” exemption you can use to protect the equity in your home. To determine how much equity you have in your home, take the market value and subtract the liens you have on your property: Mortgage, second mortgage, home equity line of credit, and loans you have on the home for the roof, windows, siding, home improvement loans, tax liens, and other debt you have tied to your house. For example, let us assume you have a home with a market value of $150,000.00, you owe $130,000.00, and you are the only person on the deed. In that case your equity is $20,000.00. In that case you would use $20,000.00 of your real property exemption to protect your home. The maximum amount of the real property exemption is $23,675.00 for an individual. If you and your spouse file a joint bankruptcy you can each protect up to $23,675.00 of the equity.
You can protect up to $12,625.00 worth of your household goods and furnishings using the “household goods and furnishings” exemption. This is “resale” value. You will not have to sell them, but it is helpful to think in terms of what you would buy them for or sell them for at a garage sale. In eleven years of practicing bankruptcy law, I have rarely seen someone get anywhere close to exceeding the overall limit for household goods and furnishings. However, if any item is worth more than $500 you cannot use the household goods and furnishings exemption for that item. Even in that case, there is another type of exemption, the wildcard exemption, which you can use to protect this item.
Most exemptions can only be used for one purpose. For example, you could not use the “motor vehicle” exemption to protect jewelry. But there is an exemption that you can use for any type of property, and that it why that exemption is known as the “wildcard” exemption. You can use the wildcard exemption to protect up to $13,100.00 for any type of property. And it is not an all-or-nothing exemption. For example, you may have equity in a motor vehicle. If you still owe money for the motor vehicle, you subtract from the market value the amount you owe on the vehicle to determine the equity. If you have equity in a motor vehicle that exceeds the $3,775.00 amount of the “motor vehicle” exemption by $2,000.00, you can use the motor vehicle exemption and you can also place $2,000.00 of your wildcard exemption on that motor vehicle in order to protect it. If you have jewelry with a value that exceeds the $1,600.00 “jewelry” exemption by $4,000.00, you can use the jewelry exemption and you can also place $4,000.00 of your wildcard on the jewelry in order to protect it.
There is a very important consideration to bear in mind when using your wildcard exemption. The wildcard exemption and the real property exemption are tied to each other. The more real property exemption you use, the less wildcard exemption you have available. If you use no real property exemption at all, your wildcard exemption is $13,100.00. If you use your entire real property exemption of $23,675.00, the total amount of wildcard exemption you can use shrinks down to $1,250.00. The real property exemption does not start cutting into the wildcard exemption until you get to $11,825.00. You can use up to $11,825.00 of your real property exemption and still have available the full $13,100.00 of your wildcard exemption.
The above information is not intended to be used as legal advice. There are many other Federal exemptions which are not common enough for inclusion in this article but which may apply to your circumstances. All of the exemptions described in this article are Federal exemptions. If the Federal exemptions are not high enough to protect the equity in your residence, there is an alternative method of exempting your property using the Michigan exemptions. The Michigan exemptions are beyond the scope of this article. If you are considering filing for bankruptcy the best thing to do is call our office and schedule a free consultation with our bankruptcy attorney so that you can receive advice which is tailored to your unique financial circumstances.