What Assets Can You Keep in a Bankruptcy?

August 1, 2013

bankruptcyMany people who are carrying enormous amounts of debt are reluctant to file for bankruptcy out of fear that they will “lose everything.” That conjures up visions of being penniless and walking the streets with little more than the clothes on your back. Obviously, no one would choose that outcome if they could possibly avoid it – even if it means bearing the pain of carrying unsustainable debt loads a little bit longer.

Fortunately, filing for bankruptcy does not involve losing everything you have. How much you can keep depends upon what type of bankruptcy you file – Chapter 13 or Chapter 7. Chapter 13 initiates a multiyear repayment plan, and generally allows you to keep most of your assets. One of the most popular reasons people file for Chapter 13, rather than Chapter 7, is that it generally allows you to keep your home.

Chapter 7 on the other hand, cuts deeper into your personal assets. Your debts will be instantaneously liquidated, then any excess assets that you own will be taken by the courts, sold and the cash distributed to settle your debts. But even under Chapter 7, you can still retain some assets, and often a surprisingly large amount.

The amount of assets you are able to retain under bankruptcy depends upon your individual state law. There are federal bankruptcy exemption provisions that loosely provide guidance for the amount of assets that you are allowed to retain, but states are not required to recognize these exemptions. A few states actually do, but most have modified them to the degree that they can look substantially different.

How much you can retain of any given asset, will depend upon the nature of the asset, and individual state bankruptcy exemption laws.

Retirement Assets

This is an asset class that enjoys a very high level of exemption under bankruptcy laws, whether federal or state. Under federal exemptions, you can retain 100% of the money in any retirement account that is exempt from taxation, though there is a $1,245,475 limit on IRAs, both traditional and Roth.

State exemptions vary, but also tend to be very generous. For example, Florida also exempts the full amount of retirement plans, but cuts the exemption for IRAs slightly to $1,171,650. There are variations in the exemption levels for each state, but as you can see, for most people their retirements accounts will be protected.

Some Real Estate Equity

Real estate (or homestead) exemptions probably vary more widely from state to state than any other exemption provision, though they are limited to owner-occupied homes only.

The federal real estate exemption allows you to protect $22,975 in real estate equity in a bankruptcy filing. (Equity is the difference between what your house is worth and how much money you owe on it).

By contrast, California allows a real estate equity exemption of up to $75,000 for a single person or $100,000 for a family. But Florida allows an even more generous exemption – it’s unlimited, though you must own the property for at least 1,215 days, otherwise it’s greatly reduced. Yet there is an unusual provision: The property cannot be larger than half an acre in a municipality or 160 acres outside.

At the opposite end of the spectrum, Illinois limits the exemption to $15,000, though married couples can double the amount.

Your Cars – Within Limits

Like real estate, bankruptcy laws allow you to exempt a certain amount of equity in your car. This is particularly important because having a car after bankruptcy is something you will need in order to make a living.

Federal law exempts $3,675 in motor vehicle equity, but the provision varies considerably from state to state. Florida allows $1,000, while California exempts $2,300 in equity.

Insurance Policies and Annuities

Federal bankruptcy provisions exempt life insurance policies that have not matured and up to $12,250 in loan value of life insurance policies.

In Illinois life insurance, annuity proceeds or cash value are exempt if the beneficiary is a child, parent, spouse or other dependent. Florida also exempts life insurance, annuity proceeds or cash value if beneficiary is a child, parent, spouse or other dependent of the person/couple filing for bankruptcy.

Furniture, Household Goods, Jewelry and Clothing

Federal bankruptcy exemptions allow for $12,250 total value of personal possessions, or $575 per individual item. It also allows $1,550 for jewelry. Florida, by contrast, limit’s the total exemptions for personal possessions to just $1,000, while California exempts “all reasonably necessary appliances, furnishings, clothes and food,” plus up to $5,000 in jewelry, family heirlooms or art.

“Tools of Trade”

Most states will allow a business person or tradesman to keep a certain value in tools. Federal provisions exempt $2,300 for tools of trade, but again, it varies in each state. Illinois limit’s the exemption to $1,500, but California expands it to $5,000.

“Wildcard Exemption”

This is a catch-all bankruptcy exemption amount that allows you to exclude larger amounts of other exemptions. Under federal law, you can use this provision to exempt $1,225 plus $11,500 of any unused portion of your homestead exemption to exempt any type of property.

Florida and Illinois allow a wildcard exemption of $4,000 each, however in the case of Florida you can only claim it if you don’t use the homestead exemption.

There are enough exemptions under bankruptcy laws that filing will hardly leave you with nothing. For the most part, exemptions will allow to keep just enough to begin rebuilding your life – and that’s the most basic purpose for filing for bankruptcy.

Have you been through bankruptcy? What was your experience? Share with and help others in the comments!


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Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids and can be followed on Twitter at @OutOfYourRut.

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