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How Bankruptcy Exemptions and Equity Work Can Protect Assets
Mar 15, 2022
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One of the biggest concerns for many people considering bankruptcy is whether or not they can keep their assets. Whether this is a home, a car, your heirloom jewelry, or the equipment you need to earn a living, protecting your most important assets is vital to recover and rebuild when the bankruptcy is over.
But how do you protect these assets? Two key elements work together to accomplish this. Here's what you need to know about exemptions and equity in bankruptcy.
What Are Bankruptcy Exemptions? Exemptions in a bankruptcy case refer to which assets — and how much value — are protected (or exempted) from seizure to pay the person's creditors. Most states provide a list of exemptions that it allows, usually including a category and a dollar limit.
For example, Georgia bankruptcy law allows you to exempt up to $5,000 of value in one or more motor vehicles. So if you own a car worth $4,500, the trustee would not use it to pay off your credit card or medical debt.
Along with state exemption lists, the federal government provides a list of its own. States may or may not allow a filer to use the federal exemptions . And these also may or may not be more beneficial. The same car owned by the Georgia resident above would only see $4,000 of its value exempted and the remaining $500 in play.
Bankruptcy exemptions vary by state. They commonly include many of the same categories, such as real property, retirement accounts, vehicles, work-related tools, jewelry, and personal property. Many states (and the federal list) also offer what's known as a wildcard exemption — a dollar amount you may generally use to exempt any property you choose.
What Is Equity? To use exemptions correctly, you must also understand how the value of assets is determined. If you own an asset like your car free and clear, your value — referred to as your equity — is its full value. However, what if you still owe money on a car loan? You would now calculate your equity by subtracting what you owe from what it's worth.
For example, consider the Georgia car owner above. What if their car is worth $9,000 on the auto market but they carry a loan with $2,000 still due. The value for exemption purposes is not $9,000 but rather $7,000 ($9,000 - $2,000). Of this, $5,000 could be exempt under federal bankruptcy guidelines. The gap that the borrower must fill is not $4,000 but only $2,000.
When you consider the actual equity in some assets, you may find that things work out better for you than they first seemed. A homeowner can exempt $25,150 of equity in their home, for instance, but this is much less than most homes are worth.
However, if your home is valued at $200,000 but you owe $175,000 on it, that property is fully exempt. Your equity is only $25,000 — just under the qualifying threshold.
In addition, things like a wildcard exemption can help as well. If your mortgage is for only $174,000, you would still have $850 subject to seizure. But you may be able to use $850 of the federal wildcard exemption to cover the rest and save the home.
Where to Learn More Like many facets of bankruptcy law, exemptions and equity calculations can be confusing. The best place to begin is to learn more about how they work in your state and how they affect your specific assets. Custer, Custer & Clark LLC Attorneys at Law can help.
We'll assess your financial situation, debts, and assets to draw up a plan that protects the things you value the most. Call today to make an appointment or get answers to your questions.
But how do you protect these assets? Two key elements work together to accomplish this. Here's what you need to know about exemptions and equity in bankruptcy.
What Are Bankruptcy Exemptions? Exemptions in a bankruptcy case refer to which assets — and how much value — are protected (or exempted) from seizure to pay the person's creditors. Most states provide a list of exemptions that it allows, usually including a category and a dollar limit.
For example, Georgia bankruptcy law allows you to exempt up to $5,000 of value in one or more motor vehicles. So if you own a car worth $4,500, the trustee would not use it to pay off your credit card or medical debt.
Along with state exemption lists, the federal government provides a list of its own. States may or may not allow a filer to use the federal exemptions . And these also may or may not be more beneficial. The same car owned by the Georgia resident above would only see $4,000 of its value exempted and the remaining $500 in play.
Bankruptcy exemptions vary by state. They commonly include many of the same categories, such as real property, retirement accounts, vehicles, work-related tools, jewelry, and personal property. Many states (and the federal list) also offer what's known as a wildcard exemption — a dollar amount you may generally use to exempt any property you choose.
What Is Equity? To use exemptions correctly, you must also understand how the value of assets is determined. If you own an asset like your car free and clear, your value — referred to as your equity — is its full value. However, what if you still owe money on a car loan? You would now calculate your equity by subtracting what you owe from what it's worth.
For example, consider the Georgia car owner above. What if their car is worth $9,000 on the auto market but they carry a loan with $2,000 still due. The value for exemption purposes is not $9,000 but rather $7,000 ($9,000 - $2,000). Of this, $5,000 could be exempt under federal bankruptcy guidelines. The gap that the borrower must fill is not $4,000 but only $2,000.
When you consider the actual equity in some assets, you may find that things work out better for you than they first seemed. A homeowner can exempt $25,150 of equity in their home, for instance, but this is much less than most homes are worth.
However, if your home is valued at $200,000 but you owe $175,000 on it, that property is fully exempt. Your equity is only $25,000 — just under the qualifying threshold.
In addition, things like a wildcard exemption can help as well. If your mortgage is for only $174,000, you would still have $850 subject to seizure. But you may be able to use $850 of the federal wildcard exemption to cover the rest and save the home.
Where to Learn More Like many facets of bankruptcy law, exemptions and equity calculations can be confusing. The best place to begin is to learn more about how they work in your state and how they affect your specific assets. Custer, Custer & Clark LLC Attorneys at Law can help.
We'll assess your financial situation, debts, and assets to draw up a plan that protects the things you value the most. Call today to make an appointment or get answers to your questions.
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