What are Bankruptcy Exemptions and How Do They Work
When you file for bankruptcy, it does not mean that you have to give up everything you own. Through what is known as “bankruptcy exemptions,” you can keep some or ALL of your assets safe, even during bankruptcy. Bankruptcy exemptions can play a significant role in Chapter 7 and Chapter 13 bankruptcy. In Chapter 7, exemptions can help determine how much of your property you can retain while in Chapter 13, exemptions can play a part in keeping your plan payments low.
Many exemptions tend to safeguard specific types of property such as a car or pieces of jewelry that means a lot to you, such as an engagement or wedding ring. Some exemptions protect up to a certain dollar amount of an asset and others can be applied towards any property that you own. If you can exempt an asset, you don’t have to worry about it being taken or having an effect on your bankruptcy proceedings.
How Bankruptcy Exemptions Work
As I explain in my book, exemptions play different roles in Chapter 7 and Chapter 13 bankruptcy. A Chapter 7 bankruptcy means liquidation of assets. The bankruptcy trustee in Chapter 7 is looking to sell off your assets in order to pay your creditors. However, when you exempt property that qualifies for exemptions, you may be able to protect some or all of the property you own. This is exactly how exemptions help you protect your assets in a Chapter 7 bankruptcy. For example, Arizona has a $6,000 motor vehicle exemption. So, if you only have one car worth $5,500, then you can keep your vehicle.
A Chapter 13 bankruptcy allows you to keep all your property and essentially reorganize your debts. But, the amount you must pay certain creditors still depends on how much property you can exempt. The value of any nonexempt assets must be paid to unsecured creditors such as credit card companies. Therefore, in a Chapter 13 proceeding, exemptions help keep plan payments low by reducing the amount of money you are required to pay your creditors.
Bankruptcy Exemptions in Arizona
Arizona has laws in place that allow the state to opt out of federal bankruptcy exemptions. This basically means that the majority of those filing for bankruptcy in Arizona are only allowed to protect their assets by using state laws. Here are some of the highlights of Arizona’s laws that address bankruptcy exemptions:
Married couples filing a joint bankruptcy in the state may if they choose to double the exemption amounts for certain items including vehicles and household goods. However, this does not apply to the homestead exemption. In cases where the doubling is allowed, each spouse may claim the full exemption amount for the specific piece of property. So, basically, they double the exemption amount for that particular asset.
You may also exempt $300 in a single bank account
Under Arizona law, debtors may exempt up to $150,000 per debtor or a married couple of their home or other property that is covered by the homestead exemption. The law exempts your house and the land on which it stands; your condo or cooperative, your mobile home and the land on which it stands if you own the land as well. The dwelling must be your primary residence, which means you and your family must actually live there. This exemption also applies to cash proceeds from the sale of a homestead property. These proceeds remain exempt for 18 months from the sale date or until they are used to purchase a new home.
Life insurance benefits that are payable or received by a surviving spouse or child are exempt up to $20,000 as are all payments to a beneficiary under health, accident or disability insurance.
You could also exempt up to $6,000 in one or more motor vehicles. If you are disabled, you may exempt up to $12,000 for a motor vehicle. The state’s motor vehicle exemption applies to your car, truck, van or any other vehicle. But, you can only use it to exempt one vehicle. If your vehicle was exempt and it gets destroyed or damages, the compensation you receive for the damage is also exempt.
Tax-exempt retirement accounts such as IRAs and 401ks are also exempt.
In addition, debtors may also exempt several other assets or pieces of property including household furniture and appliances ($6,000), clothing ($500), musical instruments ($400), animals ($500), engagement/wedding rings ($2,000), books ($250), watches ($150). You could also exempt pre-paid rent or security deposits in lieu of a homestead exemption (up to $2,000).
A debtor could also exempt about $5,000 in tools of the trade. For example, you could exempt your toolkit if your primary income is from being a handyman.
A debtor may also exempt 25 percent of his or her disposable earnings or earnings in excess of 30 times the federal minimum wage, whichever is lesser. Unemployment compensation is also exempt for the most part as is workers’ compensation.
Finding the Right Bankruptcy Lawyer
You may still be able to keep nonexempt property depending on the circumstances. If you are filing Chapter 7 or Chapter 13 bankruptcy, you need an experienced Arizona bankruptcy lawyer on your side. This can be a daunting process. Ask friends or family members for a legal referral. Do an Internet search for a local bankruptcy attorney. You can also find reputable bankruptcy lawyers by using the State Bar of Arizona’s website or other sites that rate attorneys.
Consider whether the attorney you are looking at has the experience level and personality of a lawyer with whom you would like to work. Evaluate whether he or she understands the complexity of your case and has the knowledge and resources to successfully represent you and achieve the most favorable outcome given your situation.
At Zolman Law, we are dedicated to helping people get out of debt and take those first steps toward getting their lives back in order. If you are wondering if bankruptcy is the best option for you, call us to arrange a free, no-obligation debt-free strategy session. We are here to counsel you through what can be the most challenging time of your life.