debtors (people) are allowed to exempt certain assets in bankruptcy from
seizure and liquidation by the trustee. This is in contrast to corporations,
which must surrender the equity of any property of value to the trustee.
Even though bankruptcy law is federal, each state sets its own exemptions for
its citizens. A debtor who has lived in a state for two years or longer uses
the exemptions of that state. Otherwise, the exemptions of the state where the
debtor lived two years prior to the filing of the petition are used.
has two sets of exemptions. One set is
designed primarily to protect home equity - the "home equity" set of exemptions. The other set is essentially $28,225 worth of
"wildcard" (protect anything you want) exemptions - the "wildcard" set of exemptions.
With the "home equity" set, a debtor may protect between $75,000 and $175,000 of equity in a
home, depending on their circumstances. Other categories include $3,050 (only!) of equity in a
car, $8,000 each for jewelry and tools of a trade, 75% of wages paid in the
last 30 days, full protection for most household items, and an essentially
unlimited amount for retirement benefits.
With the "wildcard" set, a debtor may protect $5,350 of equity in a car, $1,600 of jewelry,
$8,000 for tools or books of a trade, $675 of value in any household item,
retirement benefits "reasonably necessary" for support, and $28,225 to cover anything the debtor wishes, including items (like additional equity in a car) that may not
be otherwise fully protected.
These days, with many homes still being "upside down," in that the
balance(s) on the mortgages exceed the market value of the home, many debtors
choose the "wildcard" set to gain greater flexibility in
protecting their assets.
It is important to keep in mind when considering exemptions that only the
debtor's equity in an asset needs to be exempted. For example, a $500,000
home with $500,000 of loans against it has no equity, and therefore nothing to
It is also important to know that the value used for personal property is
quick-sale, or garage-sale, value. Non-exempt assets that the trustee might
seize must be sold by the trustee. This involves the expenses of obtaining the
asset, storing it, transporting it, protecting it, selling it, and accounting
Further, the item is not polished up and sold at some local trustee goods
store, but rather it is often disposed of in a wholesale manner. Because of
this, and the fact that most consumer goods drop precipitously in value once
purchased and/or used, a debtor should not use purchase price in valuing most
assets, but the lower, garage-sale value for the item. Using too high a value
will result in wasted exemptions, which may cause the loss of other property.
Another important consideration when applying exemptions to protect property,
especially in cases with significant amounts of equity in assets, is
to apply the exemptions strategically to discourage the trustee from seizing
any of the items.
Some assets, such as cash, cost the trustee very little to obtain. Other
assets, such as cars or houses, will likely involve substantial costs of
selling and disposal. A mistake made in "exemption planning" may well
cost a debtor much more than the fee paid to an experienced attorney to handle
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