Understanding Exempt Assets In Bankruptcy

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Let’s pose a hypothetical. Say you go to consult a chapter 7 or chapter 13 bankruptcy attorney in Boulder, and you’re trying to get a sense on what sort of property bankruptcy law allows you to keep as the process is ongoing. What do you think they’ll tell you? While there’s a general impression that bankruptcy will leave you with nothing at all, the truth is that there are certain types of assets that are exempt from bankruptcy proceedings. Read on to learn more.

A General Overview Of Bankruptcy Exceptions

Generally speaking, exempt assets are those which are not a part of your bankruptcy estate and cannot be taken by your creditors as part of bankruptcy proceedings. 

People require certain essentials in order to remain a part of society and exist as productive members of the collective. Exemptions exist, therefore, to grant individuals undergoing bankruptcy the ability to protect certain property from their bankruptcy trustee (who would, under any other circumstances, take that property and sell it to gain money to pay creditors).

Exemptions vary based upon the type of bankruptcy and the state in which you live. We’ll take a look at the broad strokes that you’ll see with both chapter 7 and chapter 13 exemptions.

Chapter 7 & Chapter 13 Bankruptcy Exemptions

Chapter 7 bankruptcy is what you file when you need to get clear of many types of unsecured debt on which you can’t continue making the monthly payments. Also referred to a s “liquidation” bankruptcy, this move sees the court ordering creditors to cease taking actions against you, while they simultaneously take possession of your assets and start selling them off in order to gain funds to supply to your creditors (hence the liquidation aspect of the process).

Your “essential property,” however, is shielded from liquidation. It includes things like clothing, dishes, some furnishings, and many of the “low-value” items that you own. Other assets that may be exempt from bankruptcy might include the following:

  • Retirement accounts
  • Benefits (unemployment, veterans, etc.)
  • Wages earned after bankruptcy filing
  • Money from alimony or child support
  • Life insurance
  • Awards from personal injury cases

In many cases, there’s some paperwork you must complete, which includes listing your property and its value. Then, you’ll need to make sure you know your state’s specific rules on exemption, so you can make note of which property falls within the definition (and, thus, you can keep).

By-and-large, chapter 7 bankruptcy exemptions don’t cover luxury items, so you can kiss the fancy cars and expensive swag goodbye. Again, though, you’ll have to consult your state laws to know exactly what can be exempted and what can’t, and there will be a point where you’ll need to agree on exemptions with your court-appointed trustee and creditors.

Now, when it comes to chapter 13 bankruptcy, things work a bit differently. In this debt reorganization plan, you keep your property while you adhere to a payment plan for your debts. If you complete the three-to-five-year plan and stay on top of all of said payments, then you maintain control of your possessions after exiting bankruptcy.  

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