Can I use state exemptions?

Chapter 7 Bankruptcy is considered a liquidation bankruptcy, and it will allow a US Bankruptcy Court trustee to seize your non-exempt assets, liquidate them, and take the proceeds to repay your unsecured creditors in a predetermined order.

Bankruptcy law, however, has identified certain assets which are exempt from the liquidation process. If your assets are exempt, you will be able to keep the asset. Exempt assets are determined either by state of federal bankruptcy exemption laws.

Can I use Federal Bankruptcy Exemptions?

If you live in a state which allows you to choose either the federal or state bankruptcy exemptions and you choose the federal exemption list, assets which may be protected include the homestead exemption, which will protect a certain amount of equity in your home, a wildcard exemption, which can be used to protect any type of asset, and an automobile exemption, which can be use to protect a certain portion of the value of your car.

State Bankruptcy Exemptions -Some states may allow you to choose either the federal or state bankruptcy exemptions or they may require you to use the state exemption list. Most states have exemptions similar to federal exemptions, although some states have created very generous exemptions.

When can I use my state exemptions? - Different exemptions have been created under federal and state bankruptcy laws. Whether you can use your state or federal bankruptcy exemptions will depend on your state. For example, in the state of Texas you can use either the federal or state bankruptcy exemptions, but you cannot use both, you must choose one.

Most states, however, prohibit their residents from taking advantage of the federal bankruptcy exemptions. Some states, however, will give you a choice between the state exemptions and the federal system. States which allow you to choose include the following states: Alaska, Arkansas, Connecticut, District of Columbia, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin.

How does the exemption process work?

In Chapter 7 bankruptcy, the trustee will assess the value of the asset. If the asset value is more than the exemption amount allowed, the trustee can liquidate the asset, giving you the exemption amount while paying out the overage to your creditors.

Trustees can also choose not to liquidate assets if they are not worth liquidating. Many Chapter 7 bankruptcy cases are considered non-asset cases. In a non-asset case the debtor does not have any non-exempt assets to liquidate.

Buyouts and protecting assets - If you do not want to have an asset liquidated, you may have the option to buyout the asset. The buyout prices are calculated based on the fair market value of the asset. For instance, the car valuation is based on the Kelley fair market value and a home’s value is calculated from the appraisal value. In some jurisdictions, buyouts may allow the debtor to make monthly payments. Under Chapter 7 bankruptcy, if you are unable to repurchase your assets through a buyout, the trustee will liquidate all non-exempt assets.

Chapter 13 bankruptcy is also an option for debtors who have a steady income and would like to protect their assets from liquidation.