Bankruptcy exemptions plan is an essential part for both Chapter 7 and Chapter 13 bankruptcy filings. The most significant difference between the two is that Chapter 7 bankruptcy exemptions help determine how much of your estate you get to keep. On the other hand, Chapter 13 exemptions help keep your mandatory payments low during a potential restructuring or debt rebalancing.
What Are Bankruptcy Exemptions?
Exemptions are put in place to allow you to keep certain assets in bankruptcy. These exemptions can be inexpensive cars, tools, clothing, or retirement savings that you will need going forward despite the bankruptcy. If the bankruptcy court allows you an exemption for your assets, it will prevent a bankruptcy trustee from selling those assets to raise funds to repay creditors.
While you can apply for an exemption on most assets, many exemptions protect specific assets; most commonly, these assets include automobiles or inventory up to a set dollar amount. Some exemptions can secure the entire value of particular assets or so-called “wildcard” exemptions that can be applied to protect assets outside the standard exemptions.
What About Personal Goods, Such as Jewelry, Pets, and Luxury Items?
The idea behind filing for bankruptcy is not to strip you of all your belongings, but to settle the old debt and get a fresh start. Exemptions are in place to protect your basic needs from now on, such as an automobile, tools, or housing. Other things that can be exempt include religious texts, burial plots, or a seat in a house of worship. But while some assets are safe during bankruptcy, this doesn’t go for all personal assets;
- Luxury assets. There is no exemption for luxury assets such as expensive cars, boats, collectibles, costly artworks, secondary homes, or other assets categorized as luxuries.
- Valuable Jewelry. Many states will allow you to keep wedding rings valued up to a specific limit. However, you should not expect to be allowed to keep luxury jewelry such as expensive watches, jewelry, or antique collections.
- Animals. Your average house pet will be safe from the trustee’s clutches. But, if you have animals that carry a higher value than the average pet, such as show dogs, breeding horses, cattle, or other animals fetching sizable fees, you will have to turn these over as assets.
How Does Chapter 7 Bankruptcy Work?
Chapter 7 bankruptcy is when an appointed trustee sells your non-exempt assets to pay off creditors. Exemptions are put in place to protect your assets from being sold off because the trustee can’t sell exempt assets. This rule can help protect assets required to rebuild after bankruptcy, such as automobiles and craft tools.
How Does Chapter 13 Bankruptcy Work?
Chapter 13 bankruptcy allows you to keep your assets during bankruptcy and reorganize your debt load. This rule can include negotiating new terms with your creditors or your business’s trade ownership to delete debt. Reorganizing your debt will help decrease the amount of outstanding debt or extend the default period.