Bankruptcy Exemptions Explained

Before a debtor decides what chapter to file for bankruptcy, it is crucial that the potential client understands the bankruptcy exemptions or else his or her property is at stake.

Under section 522 of the bankruptcy code, you can either use exemptions under the federal law or state law that is applicable to the debtor unless the state law that is applicable to the debtor under paragraph 522(3)(A) does not so authorize you to use federal law.

Also, some states like Florida, have much better exemptions that the federal exemptions.

Since the jurisdiction that I practice is in New Jersey, I have always used the federal exemptions under 11 USC 522(d) since they are much more favorable than the New Jersey exemptions.

However, if you have lived in a different state for over a 730 day period, you must use the exemption for the 180 day period before the two year period of 730 days or for a longer period of such 180 day period than in any other place. 11 USC 522(d)(3)(A).

“Under section 522(d)(3)(c) if the effect of the domiciliary requirement under subparagraph (A) is to render the debtor ineligible for any exemption, the debtor may elect to exempt property that is specified under subsection (d).” Thus, this means that in the above situation, you could use the federal exemptions.

Many potential bankruptcy clients automatically assume they can file a chapter 7 bankruptcy petition without looking at the whole picture. Sure, they may be eligible since they beat the median income. However, if you ignore the exemptions and you have non-exempt property, a chapter 7 trustee can take control of your property and sell non-exempt property unless you buy the trustee out.

Since New Jersey allows you to use either federal or state exemptions, most debtors in New Jersey use the federal exemption, but you still have to analyze one’s assets thoroughly to see if all the property is exempt.

Also when determining the value of the property, value means fair market value as of the date of filing of the petition. 11 USC 522(a)(2).

One of the most important things that a bankruptcy attorney must do is determine if the potential debtor owns real estate or ever had real estate within the last four years. Also, we have to check PACER to see if the debtor ever filed bankruptcy before plus check where the potential debtor lived in the last 730 days to see what exemptions apply.

If the debtor qualifies to file bankruptcy in New Jersey, it is imperative to get the value of any real estate, the deed and any payoffs on mortgages since this all impacts the exemptions.

For example, if a couple comes in to our office and has a home worth $300,000 and they own the property jointly by tenancy by the entirety and have a $200,000 mortgage with Cenlar and are current on their mortgage payments, what chapter bankruptcy do I file for them?

They want to file a chapter 7 since they have $85,000 in credit card debt and medical bills. They are under the median income. Also, they have two vehicles which they own free and clear worth $7,500 each and their daughter has a vehicle in her father’s name worth $5,000.

Using the federal exemptions, the debtors would have major issues if they filed a chapter 7 since the chapter 7 trustee would sell their property.

Since the home is worth $300,000 a trustee would subtract a minimum of ten per cent cost of sale or $30,000 which equals $270,000 . You would then subtract the $200,000 mortgage giving you $70,000 in equity. Since the home has $70,000 in equity you can subtract the real estate exemption of $50,300 pursuant to 11 USC 522(d)(1) which provides the following in pertinent part:

The debtor may exempt “… $25,150 in value in real property or personal property that the debtor or a dependent of the debtor uses as a residence in a cooperative that owns property the debtor or a dependent uses as a residence or in a burial plot for the debtor or a dependent of the debtor.”

Thus you can subtract $50,300 from the $70,000 which shows the debtors have non-exempt equity of $19,700 for the real estate alone without taking into consideration the 3 vehicles in the debtors’ names. Under 11 USC 522(d)(2), each debtor may exempt up to $4,000 in value in one motor vehicle. Since the debtors have vehicles worth $20,000 they could only exempt $8,000 under 11 USC 522(d)(2) and whatever wildcard exemption that is left over under 11 USC 522(d)(5). Under 11 USC 522(d)(5), they can only use $1,325 for any property not covered since they have already used the $25,150 real estate exemption.

Thus, even if the debtors home was worth less and their home was protected under the real estate exemption, there would still be major problems with a chapter 7 because of the vehicles that they own free and clear.

Even if a debtor qualifies for a chapter 7 with all the exemptions and is under the median income, if the debtor is not current on his mortgage or auto payments, then there is a risk that the creditors can move to lift the bankruptcy stay to try to foreclose on his home or repossess his vehicle.

Another exemption which caused major problems for one of our clients involves whole life insurance under 11 USC 522(d)(8) which provides the following in pertinent part:

A debtor may exempt “an aggregate interest not to exceed $13,400 less any amount of property of the estate transferred in the manner specified in section 542(d) of this title in any accrued dividends or interest under or loan value of any unmatured life insurance contract owned by the debtor under which the insured is the debtor or any individual of whom the debtor is a dependent”

One of our clients had substantial life insurance cash value but could no longer afford their mortgage payments so they converted to a chapter 7. Due to the non-exempt life insurance proceeds, they had to buy out the chapter 7 trustee to avoid him seizing their life insurance policy and its cash value.

Thus, I always advise people to be very careful before filing Chapter 7. Even though most chapter 7s are not involved, no asset cases, if you get a messy chapter 7 where there is non-exempt property, a chapter 7 trustee will move to sell the property or you will have to buy him out by paying the value of the non-exempt asset.

In determining the value of the property, it is the fair market value as of the date of the filing or with respect to property that becomes property of the estate after the date of filing, it is the value of the property as of the date such property becomes property of the estate.

In New Jersey, debtors usually will choose the federal exemptions since they are so much more favorable than the New Jersey exemptions.

If we look at the exemptions for motor vehicles, there is no New Jersey motor vehicle exemption while the federal exemption gives a debtor $4,000 for one motor vehicle under 11 USC 522(d)(2).

Also, under the New Jersey exemptions, you can exempt household goods and furniture up to $1000 while under the federal exemptions under 11 USC 522(d)(3) you are allowed to exempt not to exceed $625 in value of any particular item and a total of $13,400 in aggregate value in household furnishings, household goods, wearing apparel, appliances, books, animals, crops or musical instruments that are held primarily for personal, household use of the debtor or dependent of the debtor.

As is obvious, the New Jersey exemptions do not come close to the protection given by the federal exemptions.

In addition, New Jersey has no homestead exemption. However, the survivorship interest of a spouse in property held as tenancy by the entirety is exempt from creditors of the other spouse. However, it is the author’s opinion to always choose the federal exemptions under 11 USC 522(d) since a chapter 7 trustee would utilize section 363(h) if somebody used the New Jersey exemptions.

11 USC 363(h) provides the following in pertinent part:

“Notwithstanding subsection (f) of this section, the trustee may sell both the estates’ interest, under subsection (b) or (c) of this section and the interest of any co-owner in property in which the debtor had, at the time of the commencement of the case, an undivided interest as a tenant in common, joint tenant or tenant by the entirety, only if

(1) the partition in kind of such property among the estate and such co-owners is impracticable;

(2) sale of the estate’s undivided interest in such property would realize significantly less for the estate than sale of such property free and clear of the interest of such co-owners;

(3) the benefits to the estate of a sale of such property free of the interest of co-owners outweighs the detriment if any, to such co-owners and

(4) such property is not used in the production, transmission, or distribution for sale of electric energy or of any natural or synthetic gas for heat, light, or power”

Thus, if one uses the New Jersey exemptions, one is looking for protracted litigation in a chapter 7 and under a chapter 13, you can use a substantial exemption of $25,150 under 11 USC 522(d)(1).

Thus, the clear cut answer would be to choose the federal exemptions since it will substantially enhance the exemptions you are allowed.

In addition, if you compare the New Jersey wildcard exemption with the federal wildcard exemption, there is a major difference.

Under New Jersey, there is a $1,000 exemption in general personal property while the federal wildcard exemption under 11 USC 522(d)(5) allows $1325 plus $12,575 of any unused amount of the exemption provided under 11 USC 522(d)(1).

The federal exemption also allows $1,700 for jewelry held for the personal, family or household use of the debtor or dependent of the debtor. 11 USC 522(d)(4) while 11 USC 522(d)(6) protects up to $2,525 in value of implements, professional books, or tools of the trade of the debtor or a dependent of the debtor.

Both the federal exemptions and New Jersey exemptions are similar. New Jersey protects pensions, IRAs and Roth IRAs while the federal exemptions protect retirement funds under 11 USC 522(d)(12).

The following are other provisions of the federal exemptions that protect other assets:

11 USC 522(d)(9) protects professionally prescribed health aids for the debtor or a dependent of the debtor.

11 USC 522(d)(10) protects the debtor’s right to receive

(a) social security, unemployment or a local public assistance benefit;

(b) a veteran’s benefit;

(c) disability, illness or unemployment benefit;

(d) alimony, support or separate maintenance to the extent reasonably necessary for the support of a debtor or dependent;

(e) a payment under a stock, bonus, pension, profit sharing or annuity or similar contract on account of illness, disability, death, age or length of service for the support of a debtor and dependent of a debtor unless such plan was established by an insider that employed the debtor, such plan was on account of age or length of service, and such plan doesn’t qualify under certain provisions of the Internal Revenue Code.

Finally, under 11 USC 522(d)(11) a debtor can receive or have property that is traceable to

(a) an award under crime victim’s reparation law;

(b) A payment on account of a wrongful death of an individual of whom the debtor was a dependent to the extent reasonably necessary for the support of the debtor and any dependent thereof;

(c) A payment under life insurance that insured the life of an individual of whom the debtor was a dependent on the date of such individual’s death which is reasonably necessary for the support of the debtor or dependent;

(d) A payment up to $25,150 on account of personal bodily injury, not including pain and suffering or compensation for actual pecuniary loss of the debtor or an individual who is the dependent of the debtor.

Finally, section (e) protects a payment in compensation or loss of future earnings of the debtor or an individual to whom the debtor is or was a dependent to the extent reasonably necessary for the support of the debtor or dependent of the debtor.

See 11 USC 522 (f)(8), (9), (10) & (11).

Thus, the author’s position is that if you live in New Jersey and are filing for bankruptcy, you should always choose the federal exemptions under 11 USC 522(d).

Also, in whatever bankruptcy you are filing, exemptions are crucial. If your property is not fully exempt, a trustee could liquidate your property or you will have to buy out the trustee while your exemptions may have a large impact on your trustee payments in Chapter 13.

Author - Steven N. Taieb, Esq.

Steven N. Taieb, Esquire is a south jersey bankruptcy attorney for 35 years and is board certified in consumer bankruptcy law by the American Board of Certification which is accredited by the American Bar Association.

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