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What is Nonexempt Versus Exempt Property in Bankruptcy?.
When filing for bankruptcy, one of the most critical issues that a debtor must address is how their property will be classified. Bankruptcy law divides property into two classifications: exempt and nonexempt property. Exempt property is property that a debtor may keep, while nonexempt property is property that can be sold to pay off creditors. This distinction is crucial, as it determines whether a person can keep certain property, such as their real estate.
What Property is Exempt in Bankruptcy?
Exempt property is property that is protected from creditors in a bankruptcy. When a debtor files for bankruptcy, they are required to list all their assets, and each state has its list of exemptions that determine what assets the debtor may keep. Exempt property can include your primary residence, personal property such as clothing, furniture and household goods, tools of trade, retirement accounts, and some insurance policies. The amount and type of exempt property depend on whether a debtor chooses to use the state or federal exemptions. Each state has different exemptions, which in turn differ from the federal exemptions.
Federal rules allow the following commonly used exemptions:
- $27,900 homestead exemption;
- $4,450 motor vehicle exemption;
- $2,800 tools of the trade exemption;
- $1,475 wildcard exemption;
- $14,875 exemption for animals, crops, clothing, appliances, furnishings, books, household goods and musical instruments, each with a limit of $700 per item;
- $1,875 jewelry exemption;
- $27,900 personal injury recoveries (excluding pain and suffering and pecuniary loss);
- Any health aids or lost earning payments;
- Alimony and child support needed for support;
- Wrongful death recoveries for a person on whom the debtor depended;
- Tax-exempt retirement accounts and IRA accounts;
- Public benefits;
- Unmatured life insurance policies and loans with a value up to $14,875.
Certain exemption limits increase for couples who co-own property, but the exemptions listed above are the primary exemptions used.
Debtors filing for bankruptcy in New Jersey have a much more limited selection of exemptions. New Jersey does not have homestead or vehicle exemptions, and has a smaller blanket exemption for personal property. However, the New Jersey exemptions have no limit to the amount in retirement funds that can be exempted. Debtors that have significant retirement accounts will often choose the New Jersey exemptions for this reason.
To claim an exemption, a debtor must list all of their property with estimates on their worth. From there, the debtor must choose to use the state or federal exemption and apply it to that property.
What is Nonexempt Property in Bankruptcy?
Nonexempt property is property that is not protected from creditors in bankruptcy. Nonexempt property can be sold to pay off creditors. This can include assets such as second homes, luxury items such as jewelry or artwork, expensive cars, investments that are not retirement accounts, collections, and second properties or vehicles.
The bankruptcy trustee is responsible for selling nonexempt property and using the proceeds to pay off your creditors. The trustee is also responsible for determining what assets are nonexempt, which in turn can invoke a complex set of rules. Some property that may seem exempt can be exempt, depending on the state and specific circumstances. Further, the wildcard exemption can be applied to almost any property. The trustee will often work closely with the debtor and their attorney to determine the correct amount in exemptions and ensure that the creditors are treated fairly.
The Bankruptcy Process for Exempt and Nonexempt Property
The bankruptcy process for exempt and nonexempt property is different. In a Chapter 7 bankruptcy, the trustee will sell nonexempt property and use the proceeds to pay the creditors. Debtors can keep their exempt property, and the bankruptcy will discharge almost all unsecured debts, such as credit card debts and medical bills.
In a Chapter 13 bankruptcy, debtors can keep all their property, but they must repay their creditors over three to five years. The amount of the repayment plan is based on the debtor’s income, expenses, and the amount of debt owed. Debtors must have enough income to pay for their living expenses and the repayment plan.
In both Chapter 7 and Chapter 13 cases, debtors must attend a 341 meeting of creditors, where the trustee and creditors can ask questions about the bankruptcy filing, including the exemptions taken by a debtor.
The Importance of Exemptions in Bankruptcy
Exemptions are essential in bankruptcy because they allow debtors to keep some assets while still paying off their creditors. Without exemptions, bankruptcy would be even more punishing for debtors, as they would be left with nothing after the bankruptcy process. Allowing exemptions in a bankruptcy allows a debtor to get a fresh start after the bankruptcy process, keeping some assets to rebuild their lives more easily after the bankruptcy. Exempt property can help debtors maintain a sense of stability and dignity during a difficult time.
If you are considering bankruptcy, it is essential to hire an experienced bankruptcy attorney. An attorney can help you determine which type of bankruptcy is right for you, whether your property is exempt or nonexempt, and how to protect your assets. An attorney can also help you navigate the complex bankruptcy process, including filling out the required paperwork, attending the meeting of creditors, and negotiating with creditors.
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.
David L. Stevens
I have a passion for what I do. There are few things I enjoy more than helping good people and viable businesses find solutions to overwhelming debt.
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