The Basics: Protection of Your Assets

When you file a Chapter 7 bankruptcy, most of the time you can keep whatever you own. These 10 bullet points will help you make sense of this.

Property exemptions are not at all as straightforward as they may seem to be: This is not a “just-check-the-boxes” kind of task. There’s much more to it than just casually matching assets to exemptions. The exemption categories might sound straightforward about which of your assets they would cover, but very often they are not. For example, do the home contractor tools and equipment from a former business qualify under the “tools of trade” exemption if the debtor is not currently using them but hopes to in future employment? Understanding the exemptions requires being familiar with local and appellate court decisions, as well as how the trustees and judges are informally interpreting them.

Federal and state exemption schemes: Congress has left it up to each state whether to give its residents the choice of using either a federal set of exemptions (found in the Bankruptcy Code) or a set of exemptions created by the state, OR to be required to use only the state set of exemptions. Choosing between the federal and state exemptions—when you have the option—is a crucial and often not obvious election.

Whether you can use a state’s exemption scheme is a matter of timing: Which state’s scheme you must use depends on how long you’ve lived in your present state. You must have been “domiciled” in your current state for two full years before filing bankruptcy, or you cannot use the set of exemptions available to residents of that state. Otherwise you have to use the exemptions of the state where you were “domiciled” during the 6-month period immediately before those two years.

Careful pre-bankruptcy planning can protect assets that exceed the applicable exemptions: In your bankruptcy documents you must report—under penalty of perjury—information about transactions that happened before filing bankruptcy. These transactions can be scrutinized by the trustee and/or creditors, can in some cases be undone, and can also cause other significant problems. Your actions could jeopardize your ability to get a discharge of your debts, and even expose you to criminal liability. Pre-bankruptcy planning can be valuable, but you must do this with highly competent legal counsel.

Some trustees are more aggressive than others: Although you should have no surprises about your protected assets if you are represented by an attorney, your situation can get complicated if you have an unusually pushy trustee. After all, asset values are a matter of opinion, so the trustee may believe an asset’s value exceeds the exemption when you believe it does not. Because you cannot usually know in advance which trustee you will get out of a “panel” of them, you should assume you will get the “worst” of them.

Be thorough in listing assets: The failure to list some of your assets in your bankruptcy documents can jeopardize your entire case, and in extreme cases even lead to criminal charges against you by the U.S. Attorney. Also, failing to list an asset which would have been exempt can result in losing the right to claim that exemption later, and thus potentially losing that asset.

The trustee does not HAVE to take an asset just because it’s worth more than the exempt amount: Bankruptcy trustees can decide not to pursue an asset even if it is either partly or completely not exempt because 1) the asset is not worth enough to justify the trustee’s efforts to collect or liquidate it; 2) the trustee is not willing to bear the costs to collect or liquidate it (such as paying the attorney fees needed to pursue a claim of the debtor); or 3) the asset has problems which arguably outweigh its potential liquidation benefits to the trustee (such as land polluted with hazardous waste).

You may be able to pay the trustee for the right to keep a non-exempt or partially non-exempt asset: Paying the non-exempt value of an asset, such as a vehicle, may be your best alternative, compared to doing without a vehicle, or risking getting an unreliable one, or filing a 3-to-5 year Chapter 13 case just to save your vehicle.

Sometimes it’s fine for the trustee to take some of your assets: You may not need them—such as the leftover assets of a closed business—and may appreciate handing the liquation hassles over to the trustee. This could especially be true if the trustee will be using a significant part of the proceeds of sale to pay a debt you want paid, such as taxes or back child support.

The difference in exemptions under Chapter 7 and 13: Although the set of exemptions used under both chapters is the same, the exemptions have a different purpose under each one. In Chapter 7, the exemptions determine whether you have any non-exempt assets for the trustee to take from you in order to distribute their proceeds to your creditors. In Chapter 13, the exemptions are applied for the purpose of determining whether there are any non-exempt assets, and if so, how much, and then to arrange to pay that nonexempt amount to your unsecured creditors over the life of the Chapter 13 plan.