Will I lose Everything in a Northern and Central New Jersey Chapter 7 Bankruptcy?

Bankruptcy is sometimes equated with “losing everything.” Although it is true that the bankruptcy trustee can sell some of a debtor’s property to repay creditors, bankruptcy law does allow debtors to keep certain kinds of property “exempt” from such action. This blog, prepared by Mitchell Law Offices, your go-to bankruptcy lawyer in Northern and Central New Jersey, focuses on a few of the most commonly used federal bankruptcy exemptions.

Fully Exempt Property

The federal bankruptcy exemptions are generous with regard to some types of property. This means that the bankruptcy trustee cannot liquidate these items to repay creditors. Some of the most common examples of this kind of exemption include: 

  • Health aids
  • Tax exempt retirement accounts (including 401(k)s, 403(b)s, profit-sharing plans, SEP and SIMPLE IRAs, and defined benefit plans)
  • Public assistance, Social Security, Veteran’s benefits, Unemployment Compensation.
  • Crime victim’s compensation
  • Disability, unemployment, or illness benefits
  • Life insurance payments for a person you depended on, which you need for support
  • Alimony and child support needed

Property Exempt Only Up to a Certain Amount

Some of the most common of these properties and their allowable exemption amounts are …

  • Homestead property (real property including mobile homes and co-ops): exempt up to $25,150
  • Motor vehicles: exempt up to $4,000
  • Clothing, appliances and furnishings, books, household goods, and musical instruments: exempt up to $625 per item and totaling no more than $13,400
  • Jewelry: exempt up to $1,700
  • IRAs and Roth IRAs: exempt up to $1,362,800
  • Implements, books, and tools of the trade: exempt up to $2,525
  • “Wildcard” property – any property you choose: exempt up to $1,325 and the unused portion of the homestead exemption up to $12,575

How does it work?

If the debtor’s equity in property (how much the property is worth, less any amounts owed on it) is equal to or less than the exemption amount, the debtor keeps the property. If the debtor’s equity in property is more than the exemption amount, the bankruptcy trustee will pay the debtor the exemption amount, and use the remainder to pay creditors.

Example: Sam bought a car outright, and it’s worth $2,500. Using the federal bankruptcy exemption for motor vehicles ($4,000), Sam would keep the car, because the exemption fully protects his equity in the car.

If Sam’s car were worth $10,000, the bankruptcy trustee will likely sell the car, pay Sam $4,000 for the exemption, and use the rest to pay his creditors.

Next Steps

If you’re considering bankruptcy, understanding the available bankruptcy exemptions is crucial. Experienced bankruptcy attorney Douglas Mitchell can assess your situation and provide individualized advice on how bankruptcy will affect your property. Contact Mitchell Law Offices today.