A chapter 7 bankruptcy is a liquidation proceeding. If you qualify, chapter 7 liquidates your non-exempt assets (for most debtors, all your assets are exempt) and eliminates all of your dischargeable debts. If the rare cases where you have assets that are not exempt, the bankruptcy trustee is entitled to sell those non-exempt assets and use the proceeds to pay your creditors, pro rata.
The next question, of course, is “what are exempt assets?” First, “assets” means everything that you own, including your house, car, household furniture, clothes, retirement account or pension, artwork, and so on. All of your assets must be listed on your bankruptcy petition. The Bankruptcy Code and most state laws allow someone filing a chapter 7 to exempt certain of those assets, up to a certain value, and keep them after they receive a bankruptcy discharge.
Let’s start with your house. Right now, under the Bankruptcy Code, you can protect up to $31,575 in your home’s equity. If you are filing jointly with your spouse, some states allow that amount to be doubled. That means if your house is worth $295,000 and you owe $279,000, you have $16,000 in equity and you can protect your house from being sold (assuming you continue making payments).
Most states have a separate set of exemptions that you can use instead of the Bankruptcy Code exemptions. California, for example, has a homestead exemption that ranges from $361,000 to $722,000, depending on the county where the home is located. In order to claim full homestead exemption, you have to have owned the home for 1215 days (a little over three years). Some states, such as Texas, have an unlimited homestead exemption that you can use if you’ve lived in Texas for more than 730 days (about two years) and have owned the home for at least 1215 days (longer than the Texas residency requirement).
Exemptions for other assets are set out in the Bankruptcy Code (and/or applicable state law) and are subject to cost of living adjustments each year. Currently, the federal exemption for an automobile’s equity is $5,025; for household goods, $800 per item or $16,850 total; and for qualified retirement accounts are unlimited.
The California exemptions are found in CA Code of Civil Procedure section 704.730, et. seq. The homestead exemption, depending on the county where the home is located, ranges from $371,840 to $743,681.
No matter where you live, if you want to claim the homestead exemption, you must be living in the home on the day you file bankruptcy. Also, no matter where you live, you can’t mix the state and federal exemptions. Pick the one that gives you the most benefits and stick with it.
Once all of your assets are listed, your petition will list the exempt amount of each asset, along with any excess amount. Once again, figuring out how to list your exemptions and include the appropriate federal or state code citation is complex and may require an attorney’s help.
There are requirements for filing a chapter 7 bankruptcy. The means test is probably the most important requirement because if you don’t pass it, you are not eligible to file a chapter 7. You can find the means test forms and calculator on the Bankruptcy Court’s website: https://www.uscourts.gov/forms/means-test-forms/chapter-7-statement-your-current-monthly-income
If you are like most people, you’re probably overwhelmed by all of this information. If you are, email me at martha@bankruptcysage.com for a free consultation.