Exemptions are a fundamental concept in the bankruptcy system. Determining which assets are exempt in bankruptcy has a critical impact on a bankruptcy case. It is important that a person considering filing for bankruptcy protection understand what exemptions are and how exemptions will affect their bankruptcy case.
WHAT ARE EXEMPTIONS?
A fundamental goal of the bankruptcy system is to provide debtors with relief from burdensome debts and to provide a fresh start on their finances. However, the bankruptcy system also protects creditors and their claims for payment. In exchange for receiving a fresh start, you must be willing to sacrifice some of your assets to pay creditors’ claims. However, not all of your assets can be taken. You need to have certain basic possessions and assets to have a fresh start after the bankruptcy. The bankruptcy system offers you protections for those basic assets and possessions. These protections are laws called “exemptions”.
When you file for bankruptcy protection, it creates a bankruptcy estate. The estate consists of most of the debtor’s assets and property. A bankruptcy trustee is appointed to administer the assets of the estate and make payments on creditors’ claims. However, you are allowed to claim certain property as exempt. If your property is exempt, then that property cannot be used to pay your creditors’ claims and you are able to keep it.
HOW DO EXEMPTIONS WORK?
How exemptions work in your case depends on the value of the exemption, the value of your assets, and whether your asset has any liens or loan against it.
Although a few exemptions have no value limits, most exemptions are capped at a specific dollar amount. For example, a common exemption in Oregon is the protection for a motor vehicle. That protection is currently capped at $3,000. A single person in bankruptcy can claim a $3,000 protection on one vehicle; a married couple in a joint bankruptcy proceeding can claim two $3,000 protections, either both on one vehicle (for a total of $6,000) or on two separate vehicles at $3,000 each.
Assets may be only partially exempt. For example, if your car is worth $8,000 and you claim a $3,000 exemption, then there is $5,000 in nonexempt equity left in that car. In that case, the trustee is allowed to apply the non-exempt amount of $5,000 to pay your creditors’ claims. If necessary, the trustee could sell the asset, pay you the exempt amount of $3,000, and apply the remaining balance to the claims.
It is important to recognize that the exemption protections apply to a person’s equity in an asset. If an asset has a loan or lien against it, that loan or lien reduces the amount of equity the person has. For example, if you own a $3,000 car outright, without any title loans or liens against it, then the $3,000 exemption covers the value of that vehicle; however, if your $3,000 car has a $3,000 loan against its title, then you have no equity in that asset and it is not necessary to claim the exemption. Or, if your car is valued at $8,000, but you have a loan of $5,000 against it, then the remaining $3,000 of equity can be protected with an exemption.
WHO CAN CLAIM EXEMPTIONS?
People who file bankruptcy are entitled to claim the exemption protections. Business entities, such as corporations, partnerships or LLCs, are not allowed to claim exemptions in bankruptcy.
HOW DO EXEMPTIONS AFFECT MY BANKRUPTCY CASE?
How the exemptions affect your case depends on the type of bankruptcy case you file:
Liquidation Bankruptcy: Chapter 7
In Chapter 7 bankruptcy, the bankruptcy trustee’s task is to locate your assets that can be liquidated for the benefit of your creditors. If a particular asset is not protected by a legal exemption (called a “nonexempt asset”), the trustee can sell the asset to generate funds to pay creditors’ claims. If a particular asset is entirely protected by an exemption, it cannot be liquidated. Matters can become complicated when an asset is only partially-exempt or when the asset is also subject to a lien or loan.
If an asset is not entirely protected by an exemption, it does not necessarily mean that the trustee will liquidate the asset. The bankruptcy trustee will incur expenses in selling an asset that may make the asset not worth the hassle of liquidation. Also, the trustee will entertain your offers to repurchase the nonexempt asset by lump sum cash payments to the trustee.
Dealing with the implications of non-exempt assets in Chapter 7 can be complex. If you have questions about whether your assets may be exempt or whether your assets might be liquidated in Chapter 7, you should discuss your case with an experienced bankruptcy attorney.
In the reorganization bankruptcies, such as Chapter 13, there is usually no liquidation of your assets because you agree to repay all or part of your debts over the life of your bankruptcy payment plan. However, the value of your nonexempt assets impacts the amounts that must be paid to your creditors during your bankruptcy payment plan.
For the bankruptcy judge to approve your payment plan, the payment plan must pay more to unsecured creditors than the unsecured creditors would receive if you filed a Chapter 7 bankruptcy and your nonexempt assets were liquidated. For example, if your unsecured creditors would receive a total of $10,000 if you filed Chapter 7 bankruptcy, then those creditors must receive at least $10,001 during the life of your payment plan; if the creditors would receive $500 in Chapter 7, then they must receive at least $501 in the payment plan.
Those minimum payment amounts to creditors can impact the length of your payment plan and the amount of your monthly payments. For example, if you are required to pay a minimum of $6,000 to your unsecured creditors during a 60-month payment plan, it means your monthly payments must average at least $100; if you are required to pay a minimum of $12,000 to your unsecured creditors, your payments must average at least $200 per month. Other factors may also affect your plan payments, like the trustee’s fees, your attorney fees, and priority debts such as tax arrears and child support arrears.
WHAT EXEMPTIONS APPLY TO MY CASE?
As discussed in another article, people filing for bankruptcy in Oregon can now choose between two sets of exemptions: Oregon state exemptions or federal bankruptcy exemptions.
However, there is a two-year residency requirement. If you have not lived in Oregon for the prior two years, you may be required to claim another state’s exemptions or you may be limited to the federal bankruptcy exemptions. In that situation, determining what exemptions apply to your case is complicated. If you have moved to Oregon within the two years before your bankruptcy case is filed, you should contact an experienced bankruptcy attorney to help you analyze what exemptions apply to your case.
WHAT ARE THE EXEMPTIONS?
You can find a list of common Oregon exemptions here.
You can find a list of the federal bankruptcy exemptions here.
Please note: Exemptions laws change periodically and change the amount or scope of the exemptions. For example, the Oregon legislature recently increased the amount of the “tools of the trade” exemption. In addition, judicial rulings may affect whether certain exemptions apply in certain circumstances (such as whether a tractor or ATV is considered a “motor vehicle” for the motor vehicle exemption). For these reasons, we strongly recommend that you discuss the exemptions that may apply to your case with your bankruptcy attorney.
HOW DO I CLAIM MY EXEMPTIONS?
When you file your bankruptcy case, you do not automatically receive the benefits of the exemption laws. You must affirmatively claim the exemptions in your bankruptcy paperwork. That is done by completing and filing a bankruptcy “Schedule C”, which provides a list of your exempt assets, the laws that provides the exemption, the value of the exemptions and the value of the exempt assets.
CAN ANYONE OBJECT TO MY EXEMPTIONS?
Yes. After you file for bankruptcy protection, your creditors, the bankruptcy trustee and the U.S. Trustee can all object to your claimed exemptions. Typically, objections are raised if the person believes that the exemption you claimed is not valid (for example, if you claimed a vehicle protection for your furniture). Parties raise objections by filing a formal, written objection with the Bankruptcy Court. The objection must be filed within 30 days after the bankruptcy trustee concludes your Meeting of Creditors hearing. If an objection is filed, the Bankruptcy Judge holds a hearing regarding the validity of the exemption. If no objections are raised, then your objections are automatically approved 30 days after the conclusion of your Meeting of Creditors hearing.
If you have more questions about bankruptcy exemptions and how exemptions might affect your bankruptcy, please feel free to contact us.