Understanding & Using Bankruptcy Exemptions
In a Chapter 7 bankruptcy, the court appoints a trustee who has the authority to sell the debtor's assets and use the sale's proceeds to pay some of the debtor's debts. But as a practical matter, in most Chapter 7 proceedings, nothing gets sold. That's because, under bankruptcy law, the debtor can "exempt" certain assets.
Generally, the exemption law identifies an asset category and specifies a dollar amount for that category. The debtor keeps the assets that fall within the category so long as the debtor's equity in the assets in a particular category is less than the amount for that category. If the debtor's equity in assets in the category exceeds the amount of exemption for that category, the trustee usually sells the assets, pays any liens on the asset, and then pays the debtor the amount of exemption. The trustee then disburses the rest of the funds among the creditors.
Understanding and using exemptions is critical to a successful bankruptcy. A skilled attorney must first evaluate the debtor's assets, then select an exemption strategy based on the debtor's future plans.
Let's look at these two steps.
First, the debtor's assets must be evaluated.
Some assets, such as stocks, bonds, cash-value life insurance policies, and bank accounts, are straightforward to evaluate. Some assets, such as cars and homes, are a little more complicated and require referring to reliable sources. Some assets, however, require legal analysis. For example, if a debtor has an interest in a trust or a business, the debtor's attorney must carefully analyze the facts to come up with a fair value. Making a mistake in this analysis can result in the debtor losing valuable assets that she could otherwise keep and use.
After evaluating the assets, the debtor's attorney must look at the exemptions and analyze the debtor's long-term plans to choose an exemption scheme. An exemption scheme must be chosen because California offers debtors two different schemes. At the risk of over-simplification, one scheme provides a generous exemption in a debtor's home. The other does not offer any exemption in the debtor's home but provides a smaller (but still generous) exemption that can be applied to any category of assets, such as cash, stocks, and cars.
Depending upon the debtor's long-range plan, an experienced attorney may advise the debtor to take advantage of the generous home exemption or use the other exemption scheme to protect cars, businesses, and cash.
Exemption Analysis in Chapter 13 Cases
The exemption analysis does not just apply to Chapter 7 cases. Bankruptcy laws require that in Chapter 13, debtors must pay their unsecured creditors an amount equal to at least to what they would have received in a Chapter 7. Therefore, a skilled bankruptcy attorney must conduct a complete liquidation and exemption analysis before advising clients about chapter 13 plans.
Keeping Your House in Bankruptcy
Have questions about whether you can keep your home when you file for bankruptcy? This is a critical concern and should be addressed on an individual basis. Generally, the bankruptcy trustee will not take your primary residence if the equity you have in the home falls below the state's exemptions.
The exemption amount varies for individuals, couples, elderly, or disabled debtors.
If you want to save your home, it is probably more effective to file Chapter 13, allowing you to continue to pay the mortgage and with late payments paid off in the repayment plan. When you file for bankruptcy, you still owe your mortgage payments unless you own your home outright, which is rare. If you continue to make the payments on time and propose a plan to catch up on the back payments, you can avoid foreclosure. If you propose a well-drafted chapter 13 plan, the late fees and penalties will stop while you are in bankruptcy.
Filing for Bankruptcy to Keep Your Home
Filing for bankruptcy puts an immediate halt on the foreclosure proceedings, allowing you the time to sort out the problem or even seek a modification. In some cases, a lender or other party committed fraud in some aspect of the mortgage transaction or in the foreclosure filing. If there has been any violation of your rights under federal or state law, it may be possible to challenge the debt and achieve a significant advantage. If you have a second mortgage, and the value of your home has fallen so radically that the value of the home no longer collateralizes the second mortgage, it may be possible to "strip" that mortgage as part of a bankruptcy filing.
Keeping Your Car in Bankruptcy
Now, say you have a car loan and want to obtain bankruptcy relief while still keeping your car. In this scenario, you have several options. If you file a Chapter 7, you can work with your bankruptcy lawyer to reaffirm the debt. However, this may not be your best option. You may find that a better option is to file Chapter 13. You can propose a Chapter 13 plan that pays your car loan and possibly wipes out all other debts completely.
Depending on your circumstances, a Chapter 13 plan may offer the following advantages:
- Reduce the principal of your car loan down to the market value of your car
- Reduce the interest rate on your car loan down to the market interest rate
- Wipe out all other debts
- Stretch your payment out over five years
Another advantage of such a plan is the option it gives you AFTER the court approves your plan. Let's say after your plan is approved, you lose your job, or your car develops problems. You may be able to return the car, go back to bankruptcy court, and ask the judge to modify your plan and reduce your monthly payments.
Every case is different, but you can count on our legal team at The Fuller Law Firm, PC. We represent people in financial trouble throughout the communities of San Jose, Salinas, and Oakland. Let us look over your situation, including any worries about keeping your home, and advise you of the strategy and form of bankruptcy that will work best for you.