Chapter 7 Bankruptcy Exemptions
A consumer filing Chapter 7 bankruptcy is entitled to certain “exemptions” in order to allow them to retain assets required for a fresh start after bankruptcy. The idea is, a consumer would not be able to live their normal life and rehabilitate their financial situation without certain items, such as a car (to get to work), household items, clothing, tools of the trade, etc. It is not the objective of the bankruptcy court, or the bankruptcy system in general, to completely decimate a consumer filing bankruptcy, but rather to assist them in starting over without the burden of creditors aggressively pursuing them to collect debts. If a borrower does have items or assets beyond what is considered “exempt” the bankruptcy trustee assigned to the case is tasked with the job of liquidating such assets to raise money to pay creditors. The vast majority of chapter 7 cases, especially consumer and small business cases, are “no-asset” cases in which no assets or property is liquidated.
Some common items that are typically exempt (under most circumstances) include: house, car, clothing and household furniture and items, clothing, jewelry, electronics, tools, and many other items. In California, there is additionally a “wildcard” exemption which can be used to exempt any property up to about $22,000.00. This can even cover money in a bank account or cash.
Chapter 7 bankruptcy exemptions are intended to protect families from being completely stripped of any means to survive following a bankruptcy. It would serve no social or legal purpose, and contradict the spirit of bankruptcy protection, to take away from families all their possessions and assets in bankruptcy. Bankruptcy is designed to protect consumers and businesses, not destroy them. Exemptions are the means by which this objective is accomplished.
From a policy perspective, there is a careful balance the bankruptcy code seeks to strike between the interests of consumers (debtors) and their creditors. Obviously creditors’ interests cannot be ignored and a debtor with substantial assets must surrender those assets exceeding the exemption limits to the bankruptcy trustee for liquidation and to raise money to pay creditors. Bankruptcy exemptions are important for creditors in bankruptcy as well because they set limits on what debtors can keep. Should a debtor go into chapter 7 bankruptcy with substantial assets beyond the exemption limits, those assets are used to pay creditors through the bankruptcy liquidation process. The policy objective is give the consumer an opportunity to make a fresh start, but not to abuse the bankruptcy system either.
A prospective debtor should always consult with a bankruptcy lawyer before filing their case to determine what would be the best course of action for their particular circumstances. Based on the advice of a bankruptcy lawyer a consumer can better decide what items can be retained through the bankruptcy process. It is also critical to properly exempt assets, exemptions are not automatic, but rather must be specifically used by proper bankruptcy code citations on a debtors “Schedule C.” Even if a debtor could exempt an asset, if it is not listed properly, the trustee does not have to recognize it and can sell the asset anyway. For this, among many other reasons, it is important to work with a qualified bankruptcy attorney to get the best results in bankruptcy. Without proper exemption planning and citation, the benefits of bankruptcy protection can easily be lost.