What Can I Keep After Bankruptcy
When you file for bankruptcy, the property you own at that point (and sometimes shortly
after that), is part of what is called your bankruptcy estate. Federal law determines what
is included in your bankruptcy estate. State law determines what constitutes “property”.
For example, the federal Bankruptcy automatically excludes funds held in trust for you
(assuming you didn’t create the trust) and certain educational funds.
Monies you’ve put in an educational retirement account or a qualified state tuition
program for the benefit of your child or Grandchild -- from your bankruptcy estate. To
qualify the funds must have been deposited more than a year before you filed for
Funds deposited into plans more than one year but less than two years before the
bankruptcy filing are excluded to the amount of $5,000. Property that is included in your
bankruptcy estate under federal law can be taken and sold to pay your creditors, unless
it is exempt. The laws protecting your property from creditors and the bankruptcy
trustees are called exemption laws.
Figuring out which bankruptcy exemptions to use and how to use them is one of the
most challenging parts of filing for bankruptcy. It’s difficult because bankruptcy law is a
confusing mixture of federal and state law.
Although the US Constitution gives the federal government the power to pass laws
about bankruptcy, the federal government also gave each State long ago the authority
to choose which properties a debtor can keep when he or she files for bankruptcy.
Thus, there are two distinct schemes of exemptions which may be used in a typical
bankruptcy: those provided under State law and, including in the States of Wisconsin
and Minnesota; and, those provided under the federal exemption scheme (bankruptcy
exemptions) set out in the Federal Bankruptcy Code (the “Code”).
The exemptions apply differently to different types of creditors, and are of differing
amounts between the federal and State exemption schemes -- even as to the same
types of property! Moreover, you cannot “mix” federal and State exemptions. You may
choose only one or the other.
II. What Types of Debt Impact Your Exemptions
As a general rule, “unsecured creditors” (those creditors not having a lien on specific
property) cannot force you to sell your exempt property to pay off a debt you owe them
whether you are in bankruptcy or not.
Even if the creditor goes to court wins a court judgment against you, and takes steps to
attach a ’judgment lien’ to your property, you are still entitled to your exemption amount
before any sale proceeds are distributed to the unsecured creditor. (However, some
debts, like child support, may be an exception.)
A ‘judgment lien’ is not a voluntary lien even if it is obtained by means of a ‘default
judgment’. If all of your property is protected by exemption laws, you are said to be
"judgment proof" -- whether or not you file for bankruptcy. If you file for bankruptcy and
all your property is exempt, your case is known as a "no asset" bankruptcy--which really
means you have no non-exempt assets.
This means that your general or unsecured creditors will receive no distribution of
money or assets in your case. Thus, once again, planning in advance for your
bankruptcy can mean the difference between keeping all or most all your assets, and
possibly losing some of them to the bankruptcy trustee.
It is important to remember that your bankruptcy exemptions protect only the "equity" in
your property; that is the difference between the value of the property, and what you
owe to any creditors who have a lien or security interest in that property.
For example, if you had agreed with a creditor before bankruptcy, to pledge your
property as collateral for a debt, this property is known as "secured property," and the
debt is called a "secured" debt, and the person you owe is a "secured creditor" and they
have a "security interest" in the property. If you owe $10,000 on a car worth $12,000,
you have only $2,000 in “equity”.
The exemption for motor vehicles under the Federal Bankruptcy Code is $3,225 that will
be enough to protect the car in bankruptcy. However, under the Wisconsin scheme of
exemptions (which provides only a $1,200 exemption for equity in an automobile), you
would not be able to protect the entire equity through your exemption.
Fortunately, Wisconsin (and the Bankruptcy Code) have what is called a “wild card
exemption” which would enable you to “stack” your exemptions to protect a greater
portion of the equity in the vehicle than by using only the vehicle-specific exemption.
This will be discussed in greater detail further on.
Regardless of whether your use the federal of State exemptions in this example, you
will still have to either “reaffirm” the secured debt or “redeem” the collateral from the
secured creditor if you wish to retain the vehicle. These terms are also discussed
elsewhere in the information proved by your attorney.
III. Issues Limiting Your Exemption Claim
A. The Trustee’s Powers:
If you are unable to protect the equity in your property through the various exemptions,
and unless the creditors’ lien can be avoided (as discussed below), the trustee may
decide to sell the vehicle (paying you the amount of your exemption) and distribute the
balance to creditors.
Often, in this situation, the trustee will permit the debtor to purchase back the vehicle
from the bankruptcy estate at a discount.
This is why it is so important that your attorney have all the facts relative to your
secured collateral and other property so that you are able to make the most effective
use of your available exemptions.
B. The Problem of Purchase Money Loans:
If a debt was incurred in order to purchase the property itself (e.g. a car loan or first
mortgage), the creditor is said to have a "purchase money security interest" (PMSI).
Exemption laws offer no protection against such contractual agreements that give the
creditor a PMSI.
If, on the other hand, you merely used your car, boat, home, etc., as collateral for a loan
not related to the purchase of the item (e.g. a refinance or debt-consolidation loan), then
as to certain types of property (e.g. household goods, clothing, books, health aids, etc.),
your attorney may be able to avoid the lien of the secured creditor using a specific
motion in the bankruptcy court.
If successful, you would be able to retain this property free and clear of any creditor lien.
Of course, it will still have to fit within the chosen exemption scheme and be claimed as
exempt in your bankruptcy schedules.
C. The Impact of State Laws:
On top of the state versus federal law options, you must also pay attention to the
residency requirements. The 2005 revisions to the bankruptcy laws created new
residency requirements for debtors.
Congress wanted to discourage people from moving to states with more liberal
exemptions and then filing for bankruptcy. You must, therefore, have lived in a state for
two years before you can use that state’s exemptions.
If you have lived there for less than 2 years, you count back 2 years from the date you
file for bankruptcy and then look at where you lived for the 180 days (6 months) before
that. Whichever state you have lived in for the longest time during that 6-month period is
the state whose exemptions you can use. Some states, though, don’t allow you to use
their exemptions unless you currently live in that state.
If you get caught in this gap, you’ll have to use the federal exemptions. Although you
can’t use state exemptions if you have lived in a location for less than two years, you
can use the federal exemptions after only 91 days if the state where you’re filing allows
For example, if you want to use the federal exemptions but live in New York, where they
are not allowed, you can move to New Jersey, live there for 91 days and file for
bankruptcy in New Jersey using the federal exemptions.
If you have lived in a new state for less than 91 days, you must either file in the last
state you lived in for more than 91 days or wait to file your bankruptcy until after you’ve
lived in your current state for 91 days.
IV. Determining Exemptions
For the most part, exemptions are determined on a “per person” basis under both the
federal and State exemption schemes. However, with regard to the mestead, the federal
exemptions permit married debtors to aggregate their individual exemptions to
effectively double the available exemption (currently $10,200 per person).
Wisconsin, however, allows a married couple to have only one homestead exemption
between them (currently $40,000).
Other important differences include the fact that under the federal exemption scheme,
each debtor is permitted an exemption for only one motor vehicle, while under
Wisconsin’s exemption scheme, there is no numerical limit on how many vehicles may
be claimed as exempt -- only on the total amount of the available exemption ($1,200,
plus the unused portion of the $5,000 household goods exemption).
V. Federal Bankruptcy Exemptions
Asset Exemption Subsection of 11
USC § 522
Homestead Real property, mobile home, co-op, or burial plot: up to $20,200.
Up to $10,125 of this amount may be used as a wildcard and (d)(1); (d)(5)
applied to any kind of property.
Insurance Life insurance contract (not matured): all except credit (d)(7)
Life insurance policy loan value and accrued (d)(8)
dividends: up to $10,755.
Unemployment, disability, and illness benefits: all. (d)(10)(C)
Life insurance payments from a policy taken out on someone
the debtor Depended on: all necessary for support. (d)(11)C)
Miscellaneous Child support and alimony: all necessary for support. (d)(10)(D)
Pensions Tax exempt retirement accounts (which include 401(k)s, 403(b)s,
profit-sharing and money purchase plans, SEP and SIMPLE IRAs, (b)(3)(C)
and defined-benefit plans): all.
IRAs and Roth IRAs: up to $1,095,000 per person. (b)(3)(C)
Personal Motor vehicle: up to $3,225. (d)(2)
Household goods, appliances, furnishings, clothing, books, musical (d)(3)
instruments, animals, crops: up to $525 per item
and up to $10,775 total.
Jewelry: up to $1,350. (d)(4)
Health aids: all. (d)(9)
Recovery for the wrongful death of a person on whom the (d)(11)(8)
debtor depended: all.
Recoveries for personal injury (excluding amounts for pain and (d)(11)(D)
suffering and pecuniary loss): up to $20,200.
Payments for lost earnings: all. (d)(11)(E)
Public Public assistance benefits: all. (d)(10)(A)
Social Security benefits: all. (d)(10)(A)
Unemployment compensation benefits: all. (d)(10)(A)
Veterans. benefits: all. (d)(10)(A)
Crime victim compensation: all. (d)(11)(A)
Tools of Your
Trade Implements, tools, and books: up to $2,025. (d)(6)
Wages No exemption.
Wildcards Any property: up to $1,075. (d)(5)
Any property: up to $10,125 of the unused homestead exemption. (d)(5)
VI. Wisconsin Exemptions
ASSET EXEMPTION DESCRIPTION LAW SECTION
Homestead Property you occupy or intend to occupy to $40,000;
sale proceeds exempt for 2 years from sale if you plan to
obtain another home (husband and wife may not double) 815.20
Insurance Federal disability insurance 815.18(3)(ds)
Fire proceeds for destroyed exempt property
for 2 years from receiving 815.18(3)(e)
Fraternal benefit society benefits 614.96
Life insurance policy or proceeds to $5000,
if beneficiary is a married woman 766.09
Life insurance proceeds held in trust by insurer, if clause
prohibits proceeds from being used
to pay beneficiary’s creditors 632.42
Life insurance proceeds if beneficiary was dependent of
insured, needed for support 815.18(3)(I) (a)
Unmatured life insurance contract, except credit insurance
contract, owned by debtor & insuring debtor, dependent of 815.18(3) (f)
debtor or someone debtor is dependent on
Unmatured life insurance contract.s accrued dividends,
interest or loan value (to $4000 total in all contracts), if 815.18(3) (f)
debtor owns contract & insured is debtor, dependent of debtor
or someone debtor is dependent on
Miscellaneous Alimony, child support needed for support 815.18(3) (c)
Property of business partnership 178.21
Pensions Certain municipal employees 66.81
Firefighters, police officers who worked in city 815.18(3) (ef)
with population over 100,000
Military pensions 815.18(3) (n)
Private or public retirement benefits 815.18(3) (j)
Public employees 40.08(1)
Property Burial provisions 815.18(3) (a)
Deposit accounts to $1000 815.18(3) (k)
Household goods and furnishings, clothing, keepsakes,
jewelry, appliances, books, musical instruments, firearms,
sporting goods, animals and other tangible property held for 815.18(3) (d)
personal, family or household use to $5000 total
Lost future earnings recoveries, needed for support 815.18(3)(I) (d)
Motor vehicles to $1200, but may increase by unused portion
of Household Goods exemption. 815.18(3) (g)
Personal injury recoveries to $25,000 815.18(3) (I)
Tenant’s lease or stock interest in housing co-op, to
homestead amount (c) 182.004(6)
Wages used to purchase savings bonds 20.921(1) (e)
Wrongful death recoveries, needed for support 815.18(3)(I) (b)
Benefits Crime victims. Compensation 949.07
Social Service payments 49.41
Veterans benefits 45.35(8) (b)
Workers. Compensation 102.27
Tools of Trade Equipment, inventory, farm products, books and tools
of trade to $7500 total 815.18(3) (b)
Wages 75% of earned but unpaid wages; bankruptcy judge may
authorize more for low-income debtors 815.18(3) (h)
Wild Card None, except see Motor Vehicle Exemption above.
VII. Additional Federal Exemptions Available If Wisconsin
Exemptions Are Selected
Real Estate: None
Savings account deposits while on permanent military duty
outside the USA, unlimited amount [10 USC 1035]
Seamen’s clothing (unlimited amount) [46 USC 1110]
75% of earned but unpaid wages [15 USC 1673]
Wages of seamen while on a voyage (unlimited amount) [46 USC 11111]
Pensions (Unlimited amount):
Social security [42 USC 407]
Veteran’s benefits [38 USC 3101]
Veteran’s Medal of Honor benefits [38 USC 1562]
Military honor roll pensions [38 USC 562]
Military service employees [10 USC 1440]
Civil service employees [5 USC 8346]
Foreign service [22 USC 4060]
Insurance: Railroad workers unemployment insurance
(unlimited amount) [45 USC 352(e)]
Benefits (Unlimited amount):
Military service survivor benefits [10 USC 1450]
Judges survivor benefits [28 USC 376]
Government employee death and disability benefits [5 USC 8130]
U.S. court director’s survivor benefits [28 USC 376]
War hazard death or injury compensation [42 USC 1717]
Military service survivor benefits [10 USC 1450]
Judicial center director’s survivor benefits [33 USC 775]
Supreme Court Chief Justice Administrator’s survivor benefits [28 USC 376]
Lighthouse workers survivor benefits [33 USC 775]
Longshoremen death and disability benefits [33 USC 916]
Miscellaneous: Klamath Indian tribe benefits (unlimited amount) [25 USC 543, 545]