Simple Does It: Bankruptcy Exemptions

Here at MomVesting, we’ve started looking at the ins and outs of bankruptcy from an easier-to-understand, simple approach. So far, topics that have been touched on include assets, debts (including secured and unsecured), creditors and debtors. Today, we’ll touch on another important aspect of bankruptcy: exemptions.

What’s In It For Me?

To me, bankruptcy has this almsot menacing overtone, one that says, “just hand it all over.” Makes sense, at least somewhat, right? You owe money, and the people you owe money to want to get paid. There are exceptions to every rule, however, and bankruptcy is no different. Exemptions can help determine what it is you’ll get to keep (property, car, personal belongings, etc.) if you find yourself needing to go through the bankruptcy process.

State By State

Each state has its own list of exemptions. In some states, your state’s list is what you get as far as exemptions go; in other states, you get a choice between the state’s list and a list compiled by the federal government. Whatever state you live in can determine exactly what exemptions there are for you as you’re going through bankruptcy; if you do live in a state that offers a choice, you must pick and stick with one list of exemptions – you cannot pick freely from both lists to create a tailor-made one to suit your needs.

How It Works

Once you’ve figured out what’s on the exemption list through your state (or the federal government), you can then look at what you own and see if it’s possible for you to retain your stuff. As an example, let’s say you own an old RV that’s worth $4,000. The exemption list you’re following has an exemption of up to $6,000 for vehicles. Since your RV is less than the exemption list’s value, you’d get to keep the RV. On the flip side, say your RV is shiny and new and is valued at $20,000; that’s well above the exemption value, so you can count on the RV needing to be sold to help pay your debts.

Homestead Exemption

The homestead exemption as it pertains to bankruptcy is designed to help protect the equity in a homeowner’s property as they are going through a Chapter 7 bankruptcy (more on this chapter and others in the future). This exemption varies widely from state to state, with some states having exemption limits on the lower side to others having no property value limits and still other states that do not have a homestead exemption. How long you’ve lived in a certain state also has an affect on which state’s homestead exception you can use.

There is still more to come in regards to bankruptcy. Stay tuned over the next few weeks as we look at the different chapters of bankruptcy and other bankruptcy terms.

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