Using bankruptcy exemptions when filing for bankruptcy under Chapter 7 allows you to keep some of your valuable assets and dispose of others to pay your debts. At the very least, the process does not entirely disrupt your life. The exemption law prohibits bankruptcy trustees from selling all their assets to repay their debts. Those who apply for Chapter 7 can keep some of their properties because they usually do not have enough property or income to qualify for this bankruptcy option. You are lucky if you file for bankruptcy in Los Angeles because California bankruptcy laws allow you to use federal and state bankruptcy exemptions. However, you will need the assistance of a skilled bankruptcy attorney to understand which exemptions apply to your case and how to use them to your advantage.
Bankruptcy Chapter 7: What It Entails
Chapter 7 is a bankruptcy option for businesses and individuals seeking relief from debt. It is a liquidation bankruptcy in which your bankruptcy trustee sells or liquidates some of your assets to clear your debt.
To file for bankruptcy under Chapter 7, you must be eligible. Your first step in this process is determining your Chapter 7 eligibility. To qualify, you must take a means test. It is an assessment test establishing whether you have enough income to pay your debt. If you pass the means test, you can file for bankruptcy after gathering your income information, tax returns, and other financial documents.
You must complete a course on credit counseling. It is a requirement for those who apply for Chapter 7 and must be completed within one-eighty days of filing your bankruptcy application in court.
Next, establish your exempt assets. Bankruptcy exemptions are legal requirements that enable you to save some of your assets after filing for bankruptcy, like a car, home, clothes, and home appliances. Learn about bankruptcy laws and the exemptions available to you under federal and state law.
When you are ready, file your bankruptcy application with the bankruptcy court. The petition will include specific information regarding your financial position, like your assets, income, expenses, and debts. Ensure you have other additional documents about your obligations, property, or creditors to support your petition. Remember that you need a solid case for a judge to accept your petition.
You must pay a specific fee when submitting your documents to bankruptcy court. If you do not have the money at the time of filing, you can request a fee waiver or ask to be allowed to make installment payments.
When a judge receives your petition, they will call for a 341 meeting for your creditors. You are required to attend this meeting. It is typically an informal hearing during which creditors can question your financial position and decision to file for bankruptcy.
If the judge grants your petition, the judge will discharge some of your obligations. You will not be required to repay debts that the court has discharged. The judge will appoint a trustee to assist you with the bankruptcy process. They will be in charge of deciding what will happen to your assets and liabilities.
How Exemptions Work Under Bankruptcy Chapter 7
When you apply for bankruptcy, you ask the court to protect you from creditors for what you owe them. The United States Constitution authorizes the federal government to provide that protection. As a result, the national government has founded bankruptcy laws and courts to handle all bankruptcy cases throughout the country. When you apply for bankruptcy and seek the court's protection, you can always expect to give up a sizable portion of your assets to a bankruptcy estate run by a trustee. The court appoints the trustee to manage your bankruptcy estate. They can sell your assets to raise funds to pay some of your obligations.
However, you are not required to surrender everything you own to your bankruptcy estate. If you file for Chapter 7, you will only be required to turn over specific property to a bankruptcy trustee rather than everything you own. However, many debtors in your situation are worried about the property they can keep and the ones they must surrender.
Exempt property is what the law allows you to keep after filing for bankruptcy. It is the property that is not included in your bankruptcy estate. The trustee cannot sell an exempt property to raise money to pay the people you owe.
Non-exempt property is a property you must surrender to a bankruptcy trustee because it is not exempt. The trustee takes over all your non-exempt properties and ensures that your debts are paid.
The bankruptcy-exempt law has the potential to save the majority of your valuable assets. The necessities of the current life are properties that could be exempt in your bankruptcy case. They generally include items that are required for working and living.
Our bankruptcy laws are designed to help debtors out of overwhelming debt and back on their feet. Selling everything they own to repay their debts appears counterproductive, leaving debtors befuddled and unsure where to begin. Fortunately, the law acknowledges this. As a result, you must surrender all assets that do not fall under necessities for working and living as non-exempt property.
Understanding the Bankruptcy Estate
Except for some education trusts and pensions, everything you own becomes part of your bankruptcy estate once you apply for bankruptcy. With the bankruptcy trustee assigned to your case, you will create items in your bankruptcy estate according to what you own. You can include the following items in your bankruptcy estate:
- All properties currently in your possession.
- The property you own but are in control of another person, like what you have loaned to your friend or relative.
- All of the properties you have recently given away.
- Properties you are entitled to but are yet to receive.
- All profits from your property, like dividends and rental income.
- Any property received within 180 days of filing for bankruptcy, like lottery winnings or inheritance.
- What you receive as a share of your marital property.
When providing information to a bankruptcy trustee after filing for bankruptcy, it is best to be as truthful as possible. This way, you will avoid issues and challenges that could further jeopardize your case and situation.
After establishing the bankruptcy estate with your trustee, the trustee will be in charge of the estate for the duration of the case. What happens to the properties you have listed in the estate will be determined by your ability to protect them using bankruptcy exemption laws.
After completing all of the paperwork in your bankruptcy case and having all your properties listed, you can make a note of the exempt properties in your estate. Some assets can be partially exempt, so you should note the exemption you can claim from them. You should be able to save any properties entirely covered by the exemption. However, if you own properties that are not exempt from sale, your trustee will begin selling them to pay some of your obligations.
Some situations can be complex. Some exemptions only cover a certain percentage of a property's equity. Sometimes, you could have obtained a debt against a non-exempt property, like a mortgage or car loan. In cases like these, the creditor's claim on that property dictates that they receive payment first.
For example, if your vehicle is worth $10,000 but can only exempt $7,000 of its equity from your estate, you will still owe $3,000. The trustee will pay your creditor $3,000, leaving you with $7,000 in vehicle equity. Your trustee will not sell your vehicle because the bankruptcy exception protects all vehicle equity.
However, if your state only exempts $3,000 on your vehicle equity, it is in your best interest for the trustee to sell the vehicle. When that occurs, the trustee can discharge the debt on the car, give you the $3,000 exemption from bankruptcy on the vehicle, and use the remainder to pay some of your other debts.
Even if a specific property is not exempt, your trustee can choose to abandon it rather than liquidate it. This is true if the asset is more beneficial to you than it would be if the trustee sold it to raise payments for your creditors. Abandoning an asset usually occurs when the asset is worth slightly more than its exempt amount. Given the sales costs, your estate will not raise a significant amount from its sale to pay your debts. You could keep it in that case.
Exempt Vs. Non-Exempt Assets
Filing for bankruptcy can be challenging, especially when you consider the possibility of losing one or more of your valuable assets. When you file for bankruptcy, you give the court authority over your assets and liabilities. Property that you would have liked to keep can sometimes be lost. However, your bankruptcy attorney can assist you in understanding the exempt and non-exempt assets in your estate and what you can do to keep some valuable properties. General practice and court rulings have established a general idea of the types of assets that are exempt and non-exempt for those filing for Chapter 7.
Here are some non-exempt properties you could give up in bankruptcy:
- Costly musical instruments unless you can prove that you are a professional musician.
- Valuable collections of coins, stamps, and other valuables.
- Cash, stocks, bonds, bank accounts, and other financial investments.
- Family heirlooms.
- A vacation home or your second home.
- A truck or second personal vehicle.
Here are some exempt properties that you could keep after filing for bankruptcy under Chapter 7:
- A specified value of your car.
- Reasonably necessary and inexpensive clothes.
- Household items and furnishings that are reasonably necessary.
- Household appliances.
- Pensions.
- A specified value of your jewelry.
- A part of equity on your home.
- A particular value of the tools of your trade or profession.
- A percentage of your earned but unpaid wages.
- Damages awarded in a personal injury lawsuit.
- Public benefits, including welfare or public assistance, social security benefits, accumulated benefits in your bank account, and unemployment compensation benefits.
- Child and spousal support.
The exemption does not apply to your bankruptcy case automatically. After determining which assets you can keep, you must apply for an exemption. You can use it to keep all your assets if some are fully exempt from bankruptcy. The same is true for assets whose value exceeds their exemption amount. However, for those partially exempt and highly valued, like your car, home, and jewelry, you will consult with your bankruptcy attorney before deciding whether or not to apply for an exemption.
For example, if your home’s value is greater than the value of its exemption, the trustee can decide to sell it, as doing so could raise more money. They would compensate you for the value of its exemption and use the remaining money to pay your creditors.
How Much Can You Keep Using Exemptions Under Chapter 7?
Even if you genuinely want to be debt-free, losing something in which you have invested your time and money is difficult. Filing for bankruptcy under Chapter 7 allows you to keep most of your valuable assets and continue living your life even after filing for bankruptcy. However, you could wonder how much you can save by filing for bankruptcy and claiming exemptions.
That depends on how much debt you have, what kind of assets you have, and where you live. California, like most states, has a set of exemptions you can use to keep some of your most essential assets after bankruptcy. The federal system also allows you to keep a certain amount, a certain percentage of equity on your personal property, house, car, retirement accounts, and some of your wages. Clothing and household goods are also exempt unless they are costly.
The federal exemption scheme or the state exemption system are separate lists of exemptions provided by California bankruptcy law. You can select the list that best suits your needs, but you cannot use both. Your system of choice will be determined by the assets you own and wish to protect.
The bottom line is, you do not lose everything once you file for bankruptcy. The law is lenient as it allows you to keep some of your assets to keep you going after the bankruptcy process.
Chapter 7 Wildcard Exemptions
Wildcard exemptions in Chapter 7 in California allow you to save a specific amount of equity in a non-exempt property. Wildcard exemptions are available in California to applicants who use state exemptions in their bankruptcy applications. You can exempt a maximum of $1,325 from any asset that is not exempt. It allows you to keep more of your assets or money after filing for bankruptcy.
This provision allows you to save different assets on your bankruptcy estate, like bank accounts, cash, jewelry, investment accounts, and other personal assets. You can use it to exempt the extra value of assets partially exempt under other exemptions, like a car whose value exceeds the exempted amount.
However, it would be best to determine your eligibility for state exemptions before using this provision. If you are eligible for state exemptions, you can begin to identify assets in your estate that are not protected by other exemptions. Then, in your bankruptcy application, claim a wildcard exemption for those assets. It could help if you were more precise and thorough when applying for a wildcard exemption. If you make an error or omission on your application, you could lose that asset to the trustee, who will sell it to cover your debt.
Buying an Asset Not Exempted Under Your Bankruptcy Estate
You can use your bankruptcy estate to purchase a non-exempt asset. This could occur if the investment was not included in your petition or the asset was not exempt. However, you will need the bankruptcy court's permission. It is because that asset is still deemed a part of your bankruptcy estate, which is already under the bankruptcy trustee’s control. To make the purchase, you must first file a motion in court asking for permission to buy the asset.
The judge will consider different factors in response to your motion, including the asset's value and the possible impact on your creditors. The judge will also evaluate whether the purchase is in your best interests and necessary for your creditors.
Find a Competent Bankruptcy Attorney Near Me
Filing for bankruptcy is a complex decision when facing severe financial difficulties. Even if your primary goal is to manage your debts and start over, there is a lot at stake that you must consider. Walking this difficult path with the assistance of an experienced bankruptcy attorney will ensure that you have the right information and are making the right decisions to impact your case positively. We have extensive skills and knowledge in handling all bankruptcy-related cases in Los Angeles at Los Angeles Bankruptcy Attorney. Call us at 424-285-5525 to learn more about Chapter 7 exemptions and how to take advantage of them.
