Many people believe that you must sell everything you own to go through the bankruptcy process. However, this is simply not true.
The legislators who developed the bankruptcy code understood that if you were forced to sell everything, you would have nothing left to use to live. They decided that forcing you to sell everything would be counterproductive and may even end up costing the state money because you may have to go on government assistance to make ends meet.
Instead, you can keep certain property in bankruptcy. This property is considered “exempt” under either the bankruptcy code or under state law.
The Bankruptcy Estate
When you file for bankruptcy, a bankruptcy estate is automatically created. The estate includes every asset that you own, without exception. Every asset is listed on your Schedules A and B on your bankruptcy filing.
Each asset should include a value estimate as well. This estimate is based on the “retail replacement” value of the property as it stands today for household items. This valuation depends on how much it would cost for you to replace the item with another of the same age and condition. For real property, you list out the value as the “fair market value,” which is what you could sell the property for today.
What is Exempt Property?
Exempt property in bankruptcy is protected from creditors so that you can keep it. The property must meet both a “type” and a dollar amount limitation, if there is one, to qualify as exempt.
Exemptions only apply to the equity that you own in the property. Your equity is the difference between the value of the asset as it stands today and the total amount that you owe on the property to a lender or other creditor. If an asset is worth more than your exemption amount, the trustee can sell the asset and give you the dollar amount of the exemption. The remaining money after the exemption is exhausted will be provided to creditors.
Consider an example. Imagine that you own a car. The car is worth $10,000, and you still owe $3,000 on it. That means that you have $7,000 worth of equity in the car. If you choose to use the federal exemptions, the trustee will sell your vehicle and give you $3,775 of the profit, which is the upper limit of the exemption amount under federal law. The remaining $3,225 will be used to pay your creditors. Nonetheless, there are still options to keep your car in bankruptcy, even if your exemption does not cover all of your equity in the vehicle.
How to Claim Exempt Property
You must indicate which property you would like to exempt on Schedule C of your bankruptcy petition. Listing the property as exempt essentially “removes” it from the bankruptcy estate.
If you do not list which property you would like to exempt, then the trustee will be able to sell the asset and distribute the proceeds to your creditors. It is extremely important to claim your exemptions as the trustee will likely not do it on your behalf.
New Jersey Bankruptcy Exemptions
Bankruptcy exemptions apply in both Chapter 7 and Chapter 13 bankruptcy cases. New Jersey is one of just a few states that allow debtors to choose between using the exemptions listed in the federal code or the New Jersey-specific exemptions. Your bankruptcy attorney will be able to take a look at your assets and determine which set of exemptions will be the most beneficial for your situation.
An overview of the New Jersey bankruptcy exemptions is set out below.
· All cemetery property or lands used for burial purposes are exempt in full.
· All benefits for civil defense workers are entirely exempt, including benefits for medical, death, and disability.
· If a debtor receives crime victim compensation, that is exempt, but it will not include expenses that result from the injury that created the basis for the claim.
· Life insurance proceeds are completely exempt as long as the insurance policy prevents creditors from obtaining the proceeds.
· Up to $500 of annuity benefits per month are exempt.
· Proceeds from health insurance, disability insurance, and other disability benefits are exempt.
· Proceeds from group life and group health insurance are exempt.
· You may exempt $1,000 in personal property, which can be used for vehicles as well.
· Public employee pensions are completely exempt.
· All clothing is 100% exempt.
· Pay and benefits provided for participation in the state militia are exempt.
· Old age assistance and unemployment benefits are exempt.
Other exemptions are available under New Jersey law as well. The above list is just a sampling of some of the most commonly used exemptions.
Important Exemptions that New Jersey Does Not Have
Two of the largest assets that individual debtors have are often their homes and their vehicles. Unfortunately, New Jersey does not have a homestead exemption that permits debtors to keep their homes in bankruptcy. There is also no provision for vehicles, either. If a debtor would like to exempt any portion of these assets, using the federal exemptions may be a good idea.
Federal Bankruptcy Exemptions
The federal bankruptcy exemptions can be utilized if the New Jersey exemptions do not cover everything that you would like. However, you should keep in mind that you must choose one set of exemptions or the other; you cannot pick and choose which exemptions you would like to use from either the federal exemptions or New Jersey’s exemptions.
Examples of the federal bankruptcy exemptions include the following.
· $23,675 of your principal place of residence
· $3,775 for one motor vehicle
· $12,625 for household goods such as clothing, books, crops, animals, appliances, and furnishings
· $1,600 for jewelry
· $2,375 for tools of the trade (including both literal tools and other implements and books)
· $12,625 in interest in life insurance policies, accrued dividends, or loan value
· Health aids (no dollar limit)
· Retirement accounts (up to $1,283,025 on IRAs and Roth IRAs)
Certain payments that you receive as support are also completely exempt, including spousal support or child support that you reasonably need to sustain yourself. Insurance payments used for support, unemployment benefits, veteran’s benefits, disability payments, and other public assistance payments are also exempt.
Federal law also provides a $1,250 “wildcard” exemption that you can use on anything. You can also use $11,850 of any unused portion of your homestead exemption as a “wildcard” as well.
Again, these are just the most commonly used exemptions; other exemptions may be available that would be helpful for your situation.
Finding the Right Exemptions for Your Situation
Determining which set of exemptions to use can be challenging, and making the wrong choice can mean losing property or funds that you could have otherwise kept. Get help with this important choice by working with an experienced bankruptcy attorney. Call for a free consultation today.
Whether you need to completely eliminate your debt through Chapter 7 bankruptcy, or need to reorganize your credit payments through Chapter 13 or Chapter 11, we are well qualified as a full-service bankruptcy law firm for people in these and other New Jersey counties: Passaic County, Hudson County, Essex County, Bergen County, Morris County, and Sussex County. Call us today at 973-870-0434 or toll free 888-412-5091.