Filing Chapter 7 Bankruptcy: Your Car and Other Property

You must know the rules relating to exempt property when filing chapter 7 bankruptcy.  The Bankruptcy Code (11 U.S.C. § 522(b)) allows an individual debtor to protect some personal property from the claims of creditors because it is exempt under federal bankruptcy law, or under the laws of the debtor's home state.  Exemptions used to be based entirely on state law, but the latest Bankruptcy Code of 2005 tried to achieve some uniformity by establishing minimum exemptions and allowing debtors to choose between federal or state law exemptions - but not both.

Many debtors are understandably concerned with what will happen to their automobile and whether they can keep it in a chapter 7 bankruptcy.  The The Bankruptcy Code exemption for an automobile is $3,225 in equity in one vehicle only. The equity in your automobile is based on the vehicle's market value, less any loans against it.  If you have more than $3,225 in equity, you may have to surrender the vehicle so it can be sold to pay your creditors.  But if you have a loan against the vehicle and more than $3,225 in equity, you can usually keep the vehicle by reaffirming the debt.

Some of the other important exemptions that may be available to an individual filing bankruptcy under federal law (and select state law examples) are as follows:

• Homestead (applies to property used as primary residence) - The federal homestead exemption for cases filed after April 1, 2007 is $20,200.  In Texas, there is unlimited homestead exemption; in Arizona, the exemption is limited to $100,000; and in Indiana, it is just $7,500.
• Household Items (items such as appliances, furniture and clothes) - The federal exemption maxes out at $10,775, and a maximum of $525  per individual item.
• Jewelry and heirlooms - Federal law exempts up to $1225 in value.
• Tools of the trade - Federal law exempts up to $1850 in value.
• Alimony, child support, and life insurance-including disability benefits and unmatured life insurance policies-are fully exempt under Federal law.
• Public benefits (such as unemployment, workers compensation, Social Security and Veteran's benefits) are also fully exempt.
• The value of retirement funds is 100% exempt under § 522(d)(12) of the Bankruptcy Code. The exemption applies to pension, profit sharing and stock bonus plans, employee annuities, Individual Retirement Accounts (IRAs) and deferred compensation plans.