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Schedule C: Property Exemptions

Keeping Assets in a Chapter 7: Understanding Bankruptcy Exemptions

Bankruptcy Exemptions are the laws that allow you to keep assets in a Chapter 7 Bankruptcy

The most common type of bankruptcy is a Chapter 7 bankruptcy, aka a liquidation bankruptcy.  The process usually takes approximately three to four months for a standard case. During this process you file a petition that provides information about your life. This information includes your income, expenses, debts, assets, and personal information. The bankruptcy process allows you to keep certain items. If you have more then the minimal items the bankruptcy trustee sells the debtor’s nonexempt assets and uses the proceeds of such assets to pay creditors. Understanding bankruptcy exemptions can help you determine the right debt management option for you.

Who can file

Chapter 7 is an option for individuals or businesses. An individual gains fresh financial start after filing a Chapter 7 — only select debts remain after discharge. A business uses a Chapter 7 to close the business after it is no longer profitable.

 

How to qualify

When a debtor files Chapter 7, the court looks at the household income. If the household income is below the median for your state, you can qualify for Chapter 7. If your household income is above the median income for your state, you may still qualify. The court analyzes all income under the “Means Test.” This test is basically used by the court to determine if you have any disposable income at the end of every month to pay over to your creditors. The court determines the disposable income by deducting specific monthly expenses from your “current monthly income” (your average income over the six calendar months before you file for bankruptcy). Some of these expenses are actual expenses, such as car payments, mortgage payments, taxes, etc. Other expenses are based on the Internal Revenue Service standards for your county, such as utilities, food, etc.

 

Exemptions

When filing a Chapter 7, most people are most concerned about what assets you can keep. There are certain bankruptcy exemptions (or protections) that apply to anyone filing for bankruptcy. Your exemptions vary under state and federal laws. The exemptions you can use depend on state law and where you have resided for the past two years.
In Virginia, there are various exemptions that apply for residents. Some of the most common exemptions include:
Clothing: up to $1,000 of the value of clothing. Used clothing have a very low resale value; we use thrift store prices to value clothes. The only issue that ever arise are if there are a significant amount of newer designer clothes.
Vehicles: each debtor may keep up to $6,000.00 in equity in a car. If a car is jointly owned, this means a couple can have up to $12,000.00 worth of equity in the car. This means that if you have a car worth $20,000.00, but there is a $18,000.00 loan on the vehicle, there is only $2,000.00 worth of equity.
Household good and furnishings: each debtor can keep up to $5,000.00 on household goods. Generally, there is no issue with these items unless you have valuable antiques or collectibles.
Wedding and engagement rings: debtors are allowed an unlimited exemption for wedding and engagement rings. This means there is no limit on the value you can have for an engagement and/or wedding ring.
Tenants by the Entirety: there is an unlimited exemption for property titled Tenants by the Entirety (TBE) when there is no joint debt between the spouses. In Virginia, the law allows property (usually a marital home) to be titled in a specific manner between a married couple, but also requires that no joint debts exist between the parties. If you think this may apply to you, then I recommend speaking to an experienced bankruptcy attorney. Steps have to be taken to ensure there is no joint debt and that needs to be proven to the trustee in your case.
Federally-qualified retirement plans: traditional retirement plans, such as your 401(k), IRS, Thrift Savings Plan (TSP), etc. are all 100% exemption.
Tools of the trade: there is a $5,000.00 exemption for assets that are directly related to your primary profession.
Wildcard: Virginia bankruptcy exemptions are generous for everything exception a potential wildcard. A wildcard applies to any asset that has no other exemptions available, including cash in the bank and equity in a house. A debtor may also use this exemption to supplement any other exemption if more protections are needed.

Virginia’s wildcard is also called a Homestead Deed; it has this name because a document must be filed in the land records in the county in which you reside. This exemption is a $5,000.00 lifetime exemption. Debtors receive additional $500.00 exemption for any dependents.The exemption increases to $10,000.00 at the age of 65. However, since this is a lifetime exemption, if you file bankruptcy and use $1,500.00, you only have $3,500.00 remaining for any future bankruptcies filed in Virginia (until you turn 65).

 

NOTE: The above list of Virginia bankruptcy exemptions is NOT complete or exhaustive list. It includes only the most common exemptions. Additionally, these exemptions may change. 

 

Warnings about assets, exemptions and transfers 

It is also important to note that transferring assets to avoid including them in your bankruptcy is a bad plan. All transfers of property within two years of filing bankruptcy must be disclosed. The case trustee can reverse transactions. If the court determines you did the transfer with the intend to avoid a bankruptcy or to hide assets from creditors, the court may also deny you a discharge of your debts.

 

The court may review all debts that a debtor paid back within the last year. If you have paid back family, friends, or business partners, the court can actually sue those individuals for return of the funds. The court believes that a debtor must treat all creditors the same; as a result, you must treat American Express the same as Uncle Joe. Paying one creditor more money than another is considered a preference because you are giving preferred treatment to one creditor over another.
Once a Chapter 7 bankruptcy is filed, you cannot voluntarily dismiss the case.  A judge must review any request to end a debtor’s case. A judge will not dismiss your case just because a debtor is losing property or a trustee sues a debtor’s  family member.

 

An experienced Virginia bankruptcy attorney will be able to review your situation and help prevent potential problems in your case. Having an lawyer handle your case properly from the start can prevent problems later on.

 

Alternative options

If Chapter 7 is not right for your situation, there can be other options. Many people who qualify for Chapter 7 due to their income, choose to file a Chapter 13 because there are not adequate bankruptcy exemptions to protect all of their assets. If you have nonexempt assets, a Chapter 13 is another option to consider. In a Chapter 13, you are allowed to keep all nonexempt assets because debtors are required to pay out the value of these unprotected assets over the course of three to five years. Additionally, sometimes debt negotiation is a better option. If you have limited amounts of debt or cannot qualify for a Chapter 7, sometimes having an attorney help you settle a debt, is a better option.

 

 

 

Most individuals want to keep as many assets when possible, if you are filing bankruptcy.  Having an experienced bankruptcy attorney can help ensure your case goes smoothly and can help protect as many assets as possible. Attorney Ashley Morgan has experience dealing with all the above issues.
Car on the back of a tow truck

Can I Keep My Car in Bankruptcy?

Can I keep my car in bankruptcy?

One of the most common questions potential clients ask us is if they can keep a car in bankruptcy. During a Chapter 13, there is rarely an issue with a car. The question really comes up in a Chapter 7, since the court is looking at all your assets; a trustee will sell any non-exempt assets. But, the good news is that most of the time cars are not an issue in a Chapter 7.

The exemption, or protections under the law, in Virginia is fairly high; Virginia residents are allowed a $6,000.00 exemption for vehicles. If the car is owned by two individuals, the exemption is allowed for each person. Additionally, if your car has a high value, you can apply your $5,000.00 wildcard/homestead deed to help protect the car. The exemption only applies to equity in your car; so if you have a car worth $20,000.00 but you owe $16,000.00, you only need $4,000.00 in exemptions to protect the car.

A lot of debtors also say they want to keep their car out of bankruptcy. In bankruptcy you are required to list all assets and all debts. The bankruptcy will discharge the debt on the car, but the lien on the car remains. This means that the contract between you and the bank is gone, but the lender can still repossess the vehicle if payments are not made. So there is no free car, but the car company cannot make you pay for the balance of the loan if you do not want. For most of our clients, if they agree to keep paying on the debt, they can keep the car and will get the title at the end of the payments. But it also allows you the option to give up an underwater car without potential issues.

Reaffirmations

A reaffirmation is basically signing the same contract over again after filing bankruptcy. The creditor will report new payment history to the creditor reporting agencies. However, it also re-obligates you on the entire debt; so, if you fail to pay the entire loan and the car is repossessed, then the creditor can come after you for the deficiency. Additionally, a judge must sign off on the agreement; the court will likely require a hearing to prove that you can pay the debt going forward.

We rarely ever recommend the debtor sign a reaffirmation; on rare occasions there are reasons to sign them. Some creditors require a reaffirmation because they will repossess, even if you are current on your payments. Currently, the only creditor that takes this action is Ford. However, this could change at any moment. It is important to be sure you attorney is up to date about changing policies with varying lenders.

Should you keep your car?

For some of my clients, there is the question of whether you should keep the car. Chapter 7 allows a debtor to surrender the car in bankruptcy without issue of a deficiency or a repossession being reported on your credit report. For many people who have only made one or two years worth of payments on a car purchased new, you likely have negative equity in the car. Additionally, if your car was in an accident or two, there is likely a significant depreciation in value from that damage. Other individuals who find negative equity in a car are those who traded in a car with a large loss on a new car purchase.

Many people love their cars; but, we want to remind them that cars are a depreciating asset and it really is a financial decision that you are making. If you owe $25,000.00 on a car only worth $15,000.00, it is not likely to be a good financial decision to keep that vehicle. Continuing to pay on the car means you will be paying more for the vehicle than it is worth. After bankruptcy, most people’s credit increase. Additionally, many car lenders are willing to give you a car loan since you must wait at least 8 years between bankruptcy court filings (and most car loans are less than 8 years). Now if you owe $10,000.00 on a car worth $16,000.00, it is a lot easier of a decision to keep the car. You can keep that car, trade it in or sell it after the bankruptcy is over.

Cross Collateralization

One issue that most debtors do not know about is cross collateralization. This is a right that only credit unions have. Basically, if the credit union gives you a loan for a car, that lender has a lien against the car to secure the payment. The lien allows the creditor to repossess the car if the borrower does not make all of the payments. The cross-collateralization agreement allows the lien against the car (or any other collateral) to secure additional debts other than the car loan. This means that if you don’t pay a credit card, then the creditor can repossess your car.

Cross collateralization is something very few people know about. Most people understand that when finances get tight, you make sure you pay your car payment, even if you cannot pay your credit cards. But, if you aren’t paying on a credit card or personal loan, the credit union can repossess your car even if you are current on your car payments. This is important to understand when taking out car loans or opening new unsecured credit accounts.

When you file bankruptcy, your obligation to pay on all the debts is discharged, but car loan and cross-collateralized debts all remain with the car lien. This means that you may owe more on your car than you believe. Some lenders may allow you to only pay the car loan amount if you reaffirm the debt, but this policy varies from creditor to creditor. Experienced bankruptcy attorneys will usually have an idea how major lenders deal with your car in bankruptcy.

Other Options

Bankruptcy provides a debtor with various options he/she do not have outside of bankruptcy.

Redemption

One option debtors can do during you Chapter 7 is to “redeem” the car. This means during your case, you purchase the car back from the lender for the value of the car, not the total debt.

Under Section 722 of the bankruptcy code, a debtor in Chapter 7 has the right to force the lender to release its lien in exchange for a onetime payment in the value of the collateral. This can be a great way to keep your car and save money. The most difficult part of this option is coming up with the funds. There are certain lenders and programs that work with debtors on financing this payment.  When making a decision about a redemption, you should consider the total amount that would be paid (principal and interest). Additionally, there sometimes is the option of talking directly to your credit union or bank for a new car loan; this option works best if you have high income or a cosigner. But, if you want to redeem your vehicle, you should consider all possible options; some debtors are able to find the funds from family or friends, selling exempt that you kept during your bankruptcy.

Decide later

The decision about keeping the car does not have to happen immediately in the bankruptcy, unless a reaffirmation or a redemption is needed. Sometimes you want to take more time to make the decision. You do not immediately need to make the decision of whether to surrendering your car back to the lender. You can surrender the car during the bankruptcy or much later, as long as you do not reaffirm the debt. Some of my clients continue to make payments for 3 to 6 months after the bankruptcy. After their credit has bounced back, they apply for a new car payment and surrender their old vehicle then.

You have options

It is important to understand you have a lot of options. Additionally, you must take important steps to protect your assets. Talk to an experienced bankruptcy attorney about all the options that apply to your specific case and your options to handle your car in bankruptcy.

 

 

It is important to understand all your options and rights during a bankruptcy. Having an experienced bankruptcy attorney can help ensure your case goes smoothly and you come out with a fresh start. Ashley F. Morgan Law, PC helps many individuals manage their debts every month. Attorney Ashley Morgan has experience dealing with all the above issues. She understands good credit is important, and she wants her clients to completely understand all the tools at their disposal before taking action.