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Bankruptcy exemptions: why you do not 'lose it all' in Chapter 7

If you are struggling with overwhelming debt but can't bring yourself to talk about filing for bankruptcy, you are not alone. Many people see bankruptcy as a last-resort option and wait longer than they should before consulting an attorney about their financial situation. Why?

Fear is often a driving force behind the delay. You might fear the social repercussions of your neighbors or friends finding out that you filed. You might fear the effect it could have on your credit score. You might be worried about getting loans in the future. All of these are valid, but many are based on misinformation or misconceptions about bankruptcy.

One of the biggest fears people have about Chapter 7 bankruptcy, is that they will "lose everything." It is after all, called liquidation bankruptcy. This is also one of the biggest misconceptions about bankruptcy. You do not lose it all. In fact, you may be able to keep much if not all of the possessions or assets you own.

How is this possible? Let us start with the reason bankruptcy exists. Bankruptcy was designed to give people a fresh start when they cannot pay their bills, having their wages garnished and dealing with the many other consequences of overwhelming debt. There are many public policy reasons to do this.

It makes moral sense to show kindness, but it also makes economic sense. It is much better for the economy to have people spending and borrowing money, starting new business ventures and funding opportunities for children, those who will support our future generations.

In order for you to have a fresh start, you cannot lose everything. It would defeat the purpose of bankruptcy to make you repurchase your clothes and furniture, take out a new loan for a new car or wipe out the funds in your bank account. This is where bankruptcy exemptions come into play.

  • What are bankruptcy exemptions? These laws that protect certain assets, preventing the bankruptcy trustee from selling them to pay your creditors. There are different state and federal exemption plans or schedules that denote which assets you are allowed to exclude from your bankruptcy estate.
  • Can I choose which exemption schedule to follow? Congress created a federal exemption schedule but left it to the states to decide whether they wanted to follow the federal schedule or create their own. You can only follow one schedule. In Florida, you do not have a choice. You must follow the state exemption schedule, but there are certain federal exemptions you may be able to use in addition to your state exemptions.
  • What types of property can I exclude? You can exclude things such as your homestead, other real property, car, prepaid medical savings accounts, health savings accounts (HSA), educational trusts (529 plans), wages, pensions, IRAs and Roth IRAs, public benefits, workers' compensation, personal injury damages, insurance benefits, alimony or child support and miscellaneous personal items, like clothing and furniture.
  • How do exemptions work? The schedules list certain types of assets, like those mentioned above. It also lists value limitations or restrictions. For example, limitations apply to the equity you have in property, like your car up to $1,000. If your car is valued at $10,000 and you still owe $9,000, you have $1,000 of equity in the vehicle. You can keep the car, but you must also keep the loan. Bankruptcy gives you protection from creditors and time to work out new payment terms with your lender.

Determining which bankruptcy exemptions you should use is like figuring out a puzzle based on your financial situation. An experienced attorney can help you create a plan that maximizes your exemptions and allows you to keep much if not all of your property.

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