When you file for bankruptcy, it may suddenly seem like everything you own is up for grabs. In Chapter 7 bankruptcy, property can be seized and sold to pay parts of your debt. In Chapter 13 bankruptcy, the value of your assets is used to determine how much of your debts will actually have to be repaid.
However, there are rules that allow you to keep large portions of what you own, or keep it from being applied toward your total asset value. These rules are called exemptions. These exemptions outline specific values for different types of property. Anything worth up to that value cannot be seized, or does not count against you, depending on the type of bankruptcy.
There are actually two sets of exemptions to choose between. There are federal exemptions that the US government has set and there are also separate exemption laws for Hawaii. When filing for bankruptcy, you can choose either the federal exemptions or the Hawaiian exemptions. You cannot, however, mix and match between them.
Federal Exemptions
Exemptions, either federal or state, are divided up by the type of property, with specific amounts being exempt for each type. For example, the federal homestead exemption allows you to keep up to $22,975 of the equity of your primary residence. If your home is valued at $40,000, but you owe $30,000 on a mortgage, then the remaining equity is only $10,000. You can exempt all of the equity in this case.
Likewise, if your car has less than $3,675 of equity, you can exempt that as well. Other types of property and their exemption amounts include:
• $1,550 for jewelry
• $12,250 total for household goods, such as appliances, furnishings, clothes, animals, etc.
• $2,300 for professional items
Certain types of payments are also exempt. Social security payments are totally exempt. Payments from a life insurance policy, alimony, and retirement funds are also usually completely exempt. Investment accounts, such as IRAs, have a cap. That cap, however, is over $1 million.
The federal exemption rules also allow $1,225 worth of exemption that can be applied however you want. This is called the wildcard exemption, and there are some additional rules that make it a little more complicated. However, it is basically an exemption that can be applied to any sort of property or to a specific piece of property.
Federal exemptions are adjusted every three years, with new amounts and guidelines being issued in April. They were last adjusted in 2013, so you can expect new rules to be issued next year.
Hawaii Exemptions
In order to qualify for Hawaiian exemption laws, you must have lived in the state for the majority of the last 730 days. If you do not meet the minimum residency requirement, you may have to use the exemption rules of the last place you lived. The rules can be complicated when it comes to residency, and your bankruptcy lawyer will have to address each specific case to see which exemptions apply.
In general, Hawaiian rules on bankruptcy exemptions are more beneficial than using the federal rules. For example, each partner in a married couple may both take the full amount for all exemptions. This means married couples can effectively double all exemptions.
The homestead exemption in Hawaii is also larger. A head-of-household over 65 can exempt as much as $30,000 from the value of their residence. Others can exempt up to $20,000. Other specific types of exemptions and their available amounts can be found here: http://ift.tt/1M7G5ZX
If you choose to take the state exemptions, you may also take the federal non-bankruptcy exemptions. These exemptions are only available to you if you choose to use the state specific laws on bankruptcy exemptions. More information on federal non-bankruptcy exemptions can be found here: http://ift.tt/1eOKu5d
Bankruptcy exemptions allow you to keep property that might otherwise be lost in bankruptcy. They can also be used to reduce the amount that you will owe in debt. This is a rough guideline, but hopefully it will help you to navigate the bankruptcy process, and also reassure you that not all of your property will be lost in bankruptcy.
This article by Chris Rollins first appeared on Abelmann Rollins and was distributed by the Personal Finance Syndication Network.
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