The most powerful tool for a debtor is Section 522, which governs the debtor’s rights related to exempt property. When a debtor files for bankruptcy protection all of his or her property becomes part of the bankruptcy estate and under control of the bankruptcy court. The bankruptcy exemptions allow a debtor to free his or her property from the constraints of the bankruptcy court. Creditors cannot reach exempt property to satisfy their claims against the debtor.
What is Exempt Property?
Exempt property refers to the property of the debtor that the trustee is not permitted to liquidate and the debtor is permitted to retain in a chapter 7 liquidation. Other than the exempt property, virtually all of the debtor’s interests in property that have value are transferred to the trustee for the benefit of creditors. In a chapter 13 case, all property and earnings acquired during the pendency of the case are part of the estate. The estate’s interest in such property is no greater than the debtor’s interest at the time of filing the bankruptcy petition.
Exemptions do not affect valid security interests or other liens on property of a debtor. The debtor must pay the amount of the lien to remove it from the property; only the value of the interest remaining after deduction of the lien amount needs to be claimed as exempt.
What Can I Claim as Exempt in my Bankruptcy?
In most states, a debtor may choose from two sets of exemptions. A debtor may choose to utilize the exemptions provided by state law or the exemptions provided by federal bankruptcy and non-bankruptcy law. Debtors may choose federal exemptions if their state of domicile has not “opted out” of the federal exemptions. This allows states to pass laws prohibiting the use of federal bankruptcy exemptions. Thirty-states have passed such a law and in those a states a debtor may only utilize state and federal non-bankruptcy exemptions.
How to Determine the Applicable Exemption
The Bankruptcy Code attempts to discourage debtors from moving and changing their domicile to states with more generous exemption laws before filing. The state exemption law that applies to a debtor is determined by the state in which the debtor’s domicile has been located for the 730 days (24 months) immediately preceding the petition filing date. If the debtor’s domicile has not been located in a single state for the 730 day period, the applicable state exemption law is that of the state in which the debtor was domiciled for the 180 days immediately preceding the 730 day period, or in which the debtor was domiciled for the longer portion of such 180 day period. If the effect is that the debtor is ineligible for any exemption, he or she may elect the federal exemptions. Thus, a debtor will always have access to exemptions.
In the next article in our bankruptcy series we will talk about Illinois and Arizona exemptions.
Bankruptcy or Other Debt Issues?
The Kepple Law Group is highly knowledgeable in bankruptcy matters, including the discharge of debts, and can advise clients in all aspects of bankruptcy proceedings.