Protecting Assets in Chapter 7 Bankruptcy
Even when people are overwhelmed by debt, they are still often reluctant to file for bankruptcy. One reason for this is the fear that they will lose what little assets they have left, such as their home or car. But in practice, many debtors are able to keep most–if not all–of their property during and after the bankruptcy process.
When you file for Chapter 7 bankruptcy, the bankruptcy law allows you to “exempt” or protect certain assets from your creditors and the bankruptcy court. These assets are called exempt property. That means exempt assets cannot be used to satisfy your creditors. In many cases, Chapter 7 filers find that substantially all of their assets are exempt, so they can keep their property and still receive a discharge from their debts.
But the rules governing Chapter 7 bankruptcy exemptions can be difficult to understand, especially if this is the first time you have dealt with the process. For example, exemptions are not automatic, and if you forget to list the property you would want to protect, the bankruptcy trustee may sell it and pay your creditors.
So here is a brief overview of how bankruptcy exemptions work for debtors in New York and New Jersey. However, if you are going to file bankruptcy, you may want to consider hiring an experienced bankruptcy attorney.
Federal vs. State Exemptions
The first thing you need to know is that there are actually two different sets of bankruptcy exemptions available to you. Bankruptcy is governed by federal law. As part of the Bankruptcy Code, Congress established a set of federal bankruptcy exemptions. But Congress also permits individual states to create their own set of exemptions. Each state can then decide whether to mandate its residents use their exemptions, or alternatively allow a filer to choose whether to use the federal or state exemptions.
Most states now mandate the use of their own exemptions. New York and New Jersey, however, are among the minority of states that still permit the debtor to choose. So if you do file for Chapter 7, you must specify to the Bankruptcy Court whether you choose the federal or state exemptions list. This is a case of picking one or the other–you cannot cherry-pick from each list.
Homestead Exemptions
Perhaps the most commonly used bankruptcy exemption is for a person’s homestead, i.e., their primary residence. Under the federal exemptions, you can protect up to $27,900 of equity in your home (or $55,800 if spouses co-own the property). This includes a house, condominium, mobile home, or trailer where you actually live. You cannot use this exemption for an investment or rental property.
Of course, $27,900 is not much equity, especially if you live in New York or New Jersey. For this reason, a New York homeowner may wish to go with the state list. New York City and Long Island residents, for example, can protect up to $179,950 in equity under New York’s exemptions, with lesser amounts for other parts of the state. Conversely, a New Jersey homeowner may be better off with the federal exemptions, as that state does not have a separate homestead exemption.
Motor Vehicle Exemptions
After your home, a person’s next-most important asset is usually their car. The federal exemption allows you to protect up to $4,450 in equity in a motor vehicle. New York’s exemption is only slightly higher at $4,825, although if you are disabled, that amount increases to $11,975. Once again, however, New Jersey has no separate motor vehicle exemption, so debtors are stuck using the federal exemption.
Wildcard Exemptions
Federal law permits Chapter 7 debtors to claim a $1,475 “wildcard” exemption that may be applied to any property. In addition, if the debtor does not use the full amount of their homestead exemption–say they rent their house–they can apply up to $13,950 of any unused portion of the homestead exemption as a wildcard. New York’s wildcard exemption applies to any personal property, including cash, up to $1,175, but it can only be used if the debtor did not claim the homestead exemption at all. New Jersey permits a $1,000 wildcard exemption, which cannot be applied to real estate.
Personal Property
Generally speaking, you are able to exempt most basic household necessities in Chapter 7 bankruptcy. The federal list exempts clothes, furniture, appliances, books, etc., up to $700 per item and up to $14,875 in total value. You can also exempt up to $1,875 in jewelry and $2,800 for tools used in your occupation or trade. New York and New Jersey have similar state exemptions.
Public Benefits and Retirement Accounts
Federal exemptions protect Social Security benefits and other public benefits, as well as spousal or child support, and life insurance payments. Personal injury settlements are exempt up to $27,900, except for monetary loss and pain and suffering. Federal bankruptcy exemptions also protect many retirement accounts, but the exemption limit is $1,512,350 of your IRA savings. The amount is adjusted every three years.
New York and New Jersey Bankruptcy Exemptions
Although many states don’t allow bankruptcy filers to choose bankruptcy exemptions, New York and New Jersey filers are fortunate because they can. However, when filing a bankruptcy petition, you have to choose either the Federal Exemptions or the New York or New Jersey bankruptcy exemptions. You can’t pick some exempt property from one and some from the other.
However, bear in mind that you have to be a New York resident for at least two years before filing bankruptcy to be able to use the New York state exemptions. It’s similar with New Jersey – you must live in New Jersey for at least 730 days before filing to be able to use New Jersey exemptions. Otherwise, you’ll most likely be limited to using federal exemptions.
Speak with a New York/New Jersey Bankruptcy Attorney Today
This is just a brief overview of how bankruptcy exemptions work. There are a number of other assets that you may be able to protect when filing for Chapter 7 bankruptcy. A qualified bankruptcy attorney in New Jersey can review your case and offer you advice tailored to your situation. Contact the Law Offices of Wenarsky & Goldstein, LLC, today to schedule an appointment with a member of our staff.
Frequently Asked Questions: Chapter 7 Bankruptcy Exemptions
What Happens To My Retirement Accounts In Chapter 7 Bankruptcy?
Retirement accounts are typically fully protected in bankruptcy. Federal bankruptcy exemptions shield most qualified retirement plans, including 401(k)s, 403(b)s, and defined-benefit pensions. Traditional and Roth IRAs are protected up to a substantial amount that adjusts periodically. This protection ensures your long-term financial security remains intact despite filing for bankruptcy.
Can I Keep My Car If I’m Still Making Loan Payments?
Yes, in most cases. If your equity in the vehicle (its value minus the loan balance) falls within the motor vehicle exemption limits, you can keep making loan payments and retain your car. The bankruptcy trustee is only interested in non-exempt equity, not the entire value of the vehicle. You’ll need to stay current on your secured debts to avoid repossession.
Do I Lose All My Household Goods In Chapter 7?
No. The vast majority of bankruptcy filers keep all their household goods. Both federal and state exemptions protect reasonable household items. Items like furniture, clothing, appliances, and books typically remain entirely exempt property.
What Happens If Some Of My Property Is Non-exempt?
Non-exempt assets may be sold by the bankruptcy trustee to pay creditors. However, in practice, many Chapter 7 cases are “no asset cases” where debtors keep everything. When non-exempt property exists, you sometimes have options: (1) “buy back” the non-exempt portion from the trustee, (2) substitute exempt property, or (3) convert to Chapter 13 bankruptcy with a repayment plan that preserves your assets.
Are My Social Security Benefits And Public Assistance Protected?
Absolutely. Social Security benefits, veterans’ benefits, unemployment compensation, and other public benefits are fully protected under both federal and state exemption systems. These funds remain untouchable by the bankruptcy estate and creditors, even after being deposited in your bank account, provided they’re properly identified.
