What’s this about exemptions?

Very often my clients will ask me if they will lose everything if they file a Chapter 7 bankruptcy.  While Chapter 7 is liquidation, most individuals filing for bankruptcy protection under Chapter 7 have their cases deemed “no asset cases” by the appointed Chapter 7 trustee.  This is not to say that the people have no possessions whatsoever, it simply means that all of the property that those people have is protected under certain exemptions.

When  a corporation files for Chapter 7, all property is liquidated by the appointed trustee, and the proceeds are distributed to unsecured creditors pursuant to a certain priority scheme contemplated in the Bankruptcy Code.  As I mentioned above the same is theoretically true for individuals, except that individuals are granted certain exemptions — that is, property that is not counted as part of a debtor’s bankruptcy estate and thus beyond the reach of the bankruptcy trustee and creditors.  Those exemptions may come from either federal law or state law.  In many states debtors are required to use their state law exemptions scheme and may not use the federal scheme.  In Massachusetts, where I practice, debtors have  the choice of whether to use state or federal exemptions.  It is important to note that a debtor must choose ALL state exemptions or ALL federal exemptions (even in states like Massachusetts), and cannot pick and choose from the two “lists”.   Analyzing your particular situation is one of the most important jobs consumer bankruptcy attorneys have, and the correct choice can make a huge difference.

As an illustration of the importance of a proper analysis, let’s look at some of the difference between Massachusetts exemptions and Federal exemptions.  In Massachusetts, a debtor can elect to protect up to $500,000 of equity in her residential home from creditors in bankruptcy (assuming she meets certain residence requirements described in the Bankruptcy Code).  However, if a debtor chooses the Massachusetts exemption scheme, she may find that her ability to exempt other property is significantly impaired. For instance, under the Massachusetts exemption scheme a debtor may protect a maximum of $700 of equity in her vehicle.  However, under the Federal exemption scheme an individual may protect up to $3,450 of equity in her vehicle(s) (or $6,900 for a married couple filing a joint petition) and still protect $21,625 of the equity in her home (or $43,250 for a married couple filing a joint petition).  Given that many people are now facing the harsh reality of having homes that have little to no equity, some good planning and a keen understanding of exemptions and actual property values can mean the difference between keeping your property in a bankruptcy and losing them to creditors.  An added benefit of the Federal exemption scheme is the ability to apply a significant portion of the unused Federal homestead exemption to any type of property (the “Wildcard Exemption”).  This Wildcard Exemption is not available under the Massachusetts exemption scheme.   This is only one example of the importance of an in-depth understanding of the pros and cons of each type of exemption for each potential debtor’s individual circumstance.

An experienced bankruptcy attorney can help you to make the right strategic choices when considering bankruptcy.  Call the Law Offices of James Wingfield at 508-797-0200 or visit the contact page on our website to schedule a free, no-obligation consultation.