When filing for bankruptcy one of the first questions on people's minds is what they will be allowed to keep.
You’ve exhausted all other options. You’ve haggled with bill collectors. You’ve talked to debt management agencies and tried to consolidate your debt. Now you are facing your final option to get out of debt -- bankruptcy. This is a legal procedure whereby all of your assets are taken over by an estate manager. You will then have most of your debts canceled out, with a few notable exceptions like back taxes and student loans. You may also lose some of your personal property. Those declaring bankruptcy are doubtless curious what you can and cannot keep when filing for bankruptcy.
The things that you are allowed to keep after you declare bankruptcy are known as exemptions. Specific laws on bankruptcy exemptions vary from one state to another. There are, however, some commonalities that apply across the United States. It is the value of the exemptions that is the main variance between state law, rather than the specific exemptions allowed.
- Homestead exemptions are the exemptions applied to real estate that you live in. This applies only to your primary residence and not to vacation homes or second homes. The federal homestead exemptions are very low, but state exemptions are generally higher. Some states, such as Florida, do not have a ceiling on the value of your home. While you may be able to keep your home, your creditors may be able to get the equity in it.
- Your car is a slightly more difficult case. The federal exemption is very low -- only $3,450 as of 2011. However, keep in mind that this is based on the market value of the car, not what you paid for it. Most cars lose value very quickly after being purchased, so there’s a good chance that you will be able to keep your car.
- Tools of your trade are anything that you use in the course of your work. For a mechanic this would include hand tools. For a writer it could be your computer. No matter what it is that you need to do your job, there is an exemption for it under bankruptcy law.
- Household goods are things that you use regularly around your home. There are limits on the total value of these items collectively, as well as any single item. The things around your house, however, have very little in the way of resale value, so you shouldn’t worry too much about the trustee taking them and selling them for the purpose of repaying your creditors.
- Retirement savings are well protected under federal and most state laws. This protection applies to Individual Retirement Accounts (IRAs), pensions, profit-sharing, deferred compensation plans like a 401(k) and stock bonus plans. The cap on your IRA exemption is in excess of a million dollars, meaning that the vast majority of people filing for bankruptcy will not have to worry about the bankruptcy court trustee seizing it to repay past debts.
- Personal property exemptions vary widely from one state to another. Many states have exemptions for things like jewelry, life insurance and other miscellaneous property.
Filing For Bankruptcy
Unless you have large personal assets, you probably won’t have much in the way of your personal assets seized by the bankruptcy court. Most people’s belongings simply aren’t worth enough for the trustee to take them for the purpose of repaying your creditors. You should always talk to your bankruptcy attorney before you file about what you can and cannot claim as an exemption. This will give you a solid idea of what you can expect to lose -- and what you can expect to keep -- when you file for bankruptcy.