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 2 of a two-part article to give you an overview of some of the main exemptions and what they cover.
There is a “retirement accounts” exemption you can use for the funds you have in a retirement account such as a 401(k), 403(b), or an IRA. There is no limit to the amount for this exemption. There is a “pension” exemption which protects the amount you have in a pension. This exemption also has no limit on the amount. If you are thinking of filing for bankruptcy it is important to leave these funds in place. The amount you can protect when it is cash on hand or money in a bank account is limited to the $13,100.00 wildcard exemption. Also, you would likely be hit with a big tax bill at the end of the year for an early withdrawal from a retirement account.
There is an exemption for “tools of trade” in the amount of $2,375.00. If you still owe money for your tools, you subtract from the market value the amount you owe on them to determine the equity. It is only the equity that needs to be protected. If the equity in the tools of trade is greater than $2,375.00 you can also use a portion of the “wildcard” exemption to protect the equity in the tools.
There are two different Federal exemptions for life insurance policies. One exemption is for “whole life” policies and the other exemption is for “term life” policies. The main difference between whole life policies and term life policies for bankruptcy purposes is that a whole life policy has a “cash surrender” value but term life policies have no “cash surrender” value. “Cash surrender” value means that you can borrow money out of the life insurance policy. “Cash surrender value” is not the same thing as the amount paid on the policy when death occurs. There is no limit on the “term life” exemption because a “term life” policy has no present value. No funds are paid on a “term life” policy until death occurs. The “whole life” exemption protects up to $12,625.00 of the “cash surrender” value. If the “cash surrender value” is greater than $12,625.00 you can also use a portion of the “wildcard” exemption to protect the “cash surrender” value of that policy.
There is a “personal injury compensation” exemption which protects the amount you receive in a personal injury lawsuit. The amount you have to protect in bankruptcy is the amount you receive. This is different from the amount which goes toward payment of your medical bills, personal injury attorney fees, and litigation costs. The portion for attendant care and household services also does not need to be protected because personal injury case law states you are obligated to disburse those funds to the third parties who provided the attendant care and household services. The remaining amount of the personal injury settlement or personal injury award that you get to keep is the amount that you need to exempt in bankruptcy. The “personal injury compensation” exemption protects up to $23,675.00 of the amount of the personal injury settlement or personal injury award that you get to keep. If this amount is greater than $23,675.00 you can also use a portion of the “wildcard” exemption to protect the amount of the personal injury settlement or personal injury award that you get to keep.
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.