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What are exemptions?

 

You certainly won't lose all of your things. In most cases you won't lose anything, other than something you don't want to keep, or something that you can't afford to keep paying for. (For more on that subject, read the section that follows this one.) However, it is possible that you could lose something in a Chapter 7, or that you might have to give something up in order to make a Chapter 13 Plan work. It is extremely unusual to actually lose something against your will in Chapter 13, so the next couple of paragraphs will only refer to Chapter 7.

As noted in the previous section, there are two people who might have the right to take something away from you: the creditor and the Chapter 7 Trustee. The creditor would rather have the money than the collateral, so as long as you are current on the payments you usually don't have to worry about the creditor. But they can and will repossess their collateral if you don't pay them for it. (For more on this, see the separate section on Foreclosures and Repossessions.)

The Chapter 7 Trustee does have the right to take things, but only if they have a good deal of value, and are not covered by your exemptions. There are certain things that you get to keep, no matter what happens. We call these things "exemptions," because they are exempt from collection as long as you list them as part of your bankruptcy filing (and if I am your lawyer, you absolutely will list everything). An individual gets to keep up to $4,000.00 worth of personal property, and a married couple filing jointly keeps $8,000.00. (Note: As of July 1, 2010 that number will increase to $10,000 per person!) You also get to keep all of your clothes, suitcases, family bible, school books, any money that has already been paid into a pension plan or retirement account, burial plots, a certain amount of "tools of the trade," and a few other things.

As a practical matter, the only things that might be taken away from you are things that might be sold for enough money to cover the cost of selling them. For instance, nobody is going to bother with trying to sell your small appliances, your old VCR, your family photos, and most of your personal property. More than 90% of bankruptcy filers get to keep everything that they own. In a Chapter 13 if you are paying 100% to all creditors, then you will not lose anything unless you want to voluntarily give it back to the creditor.

There are certain situations when a debtor has no choice but to give certain things back to creditors, but if you can make certain payments over time you will always get to keep your property. If you are one of the rare people who has a lot of valuable property, such as stocks, bonds, antique furniture, artwork, cars, etc., and if you are filing Chapter 7, then yes, there is a good chance that you will lose some of your things. The question in those cases is whether, on balance, discharging all of that debt is worth the loss of those thing.

One of the best things about Chapter 13 is that you can usually reduce your payments and still keep your property. For instance, let’s say you have a car that is worth $10,000.00, but you still owe $20,000, and are paying $500.00 per month at 20% interest. We can always lower the interest rate down to 2 points above the prime rate* at most 15%, and in many cases we can set the payments based on the $10,000 value, rather than the $20,000 debt. In this example, the monthly payments would be reduced to roughly $190.00. (This is just one example. No two cases are ever the same.) The same thing applies to furniture, appliances, electronics, and any other secured property, except for houses.

*(On the date that this is being written the prime rate is 3.25%, so the interest rate on most secured debts in a chapter 13 plan is 5.25%.)