What property can I keep in bankruptcy?

One of the most common questions I get is what property may a debtor keep when he or she files bankruptcy.  Under the bankruptcy code and Arizona law, certain property is considered “exempt” or “protected” from creditors, including a bankruptcy trustee.  As always, it is essential for a debtor to consult with a competent Arizona bankruptcy lawyer to determine what property may have to be turned over to a bankruptcy trustee.  Here are just a few examples of exempt property:

Home:  A person’s primary residence is exempt, provided that it is does not have more than $150,000 of equity.  For example, if a debtor owns a home worth $200,000 and the debtor still owes the bank $100,000, then the home has $100,000 of equity.  Therefore, the home is exempt and cannot be taken by the bankruptcy trustee.  If the home is worth $350,000 and is paid off, then it has more than $150,000 of equity.  As a result, the trustee will force a sale of the home, give the debtor the first $150,000 of sale proceeds, and use the rest of the sale proceeds to pay the debtor’s creditors.  These days, most of us have very little or no equity in our homes because of the horrible real estate market.  A debtor can get a reasonable idea of a home’s worth by going to www.zillow.com, running comps, getting a broker’s appraisal or using other internet resources.  In a Chapter 13, you may be able to “lien strip” a junior mortgage if your house is worth less than your first mortgage.

Vehicles:  Each debtor may keep one vehicle, provided that it does not have more than $5,000 of equity.  A disabled debtor gets a $10,000 exemption instead of a $5,000 exemption.  If you are married, each spouse gets one vehicle so long as each vehicle does not have more than $5,000 of equity.  Alternatively, a couple may “stack” both of their $5,000 vehicle exemptions on one vehicle and exempt the single vehicle if it does not have more than $10,000 of equity.  A debtor can get a reasonable idea of a vehicle’s value by going to Kelley Blue Book at www.kbb.com.  Furthermore, if you have a loan securing a vehicle that is exempt, you may have to reaffirm or redeem such loan, which can get very complicated.

Retirement/Pension: A person’s retirement (such as a 401(k), IRA, 403(b), etc.) and pension is usually 100% exempt property. An Arizona bankruptcy lawyer will need to analyze which section of the Internal Revenue Code the retirement plan falls under to make sure that it is exempt.  If a debtor cashes out the retirement and puts the money in the bank, the money no longer has exempt status.  One of the biggest mistakes a debtor can make prior to filing bankruptcy is to cash out his or her retirement.

Furnishings:  Certain furnishings are exempt, such as a couch, dining table, beds, a television, and most appliances, provided that their aggregate value is not more than $4,000 ($8,000 for married debtors).  Most of us also have furnishings that are non-exempt and can be taken by a bankruptcy trustee.  For example, a microwave is non-exempt (which surprises most people).  Video games, iPods, DVD players and most electronics are non-exempt.  An entertainment center, a grandfather clock, and family heirlooms are non-exempt.  Computer equipment is non-exempt (but, strangely enough, a typewriter is exempt).  How does a debtor figure out the good faith value of furnishings?  It is not the original purchase price of the furnishings.  My suggestion is always to estimate the price of such furnishings if they were purchased at Goodwill or a garage sale.  There are some internet resources to look at as well, including www.craigslist.org.

Tools of the Trade:  Equipment and tools that a debtor primarily uses for work are exempt provided that their aggregate value does not exceed $2,500.  Therefore, if a debtor uses a computer primarily for work, it will be exempt.  If a debtor is a sole-proprietor landscaper, his landscaping tools are exempt so long as they are not worth more than $2,500.  Again, the value of such tools and equipment is determined by how much they may cost if they were purchased at Goodwill or a garage sale, not the amount the debtor spent to originally purchase them.

Money in the Bank; Food and Provisions:  Any money in a single bank account of $150 or less is exempt.  This basically means that the trustee will require a debtor to turn over funds in excess of $150 that existed as of the date of the bankruptcy filing.  A competent Arizona bankruptcy lawyer will advise a debtor to use any excess money to purchase food and provisions prior to filing for bankruptcy.  Why is that?  Because food and provisions for a 6 month supply are 100% exempt.   Any money a debtor acquires after a bankruptcy filing is the debtor’s property to keep.

Note that just because a debtor has non-exempt property does not mean that a bankruptcy trustee will take such property.  It just means that the trustee has the right to take it.  If a debtor’s non-exempt property is minimal or would be difficult for a trustee to liquidate, the trustee may not require the debtor to turn it over.  Even if a trustee does require non-exempt property to be turned over, a debtor can still bid on such property at a trustee’s auction in order to keep it.

For a complete list of arizona_exemptions, click here.

Tags: Chapter 13, chapter 7, exemptions