What is the “automatic stay” in bankruptcy?
This refers to the provision in bankruptcy law that forces all creditors to cease any and all collection activity upon notification that a debtor has filed bankruptcy. This includes harassing phone calls, lawsuit proceedings, and threatening letters.
What are bankruptcy exemption laws?
Bankruptcy exemptions are the laws that deal with giving you relief from creditors by protecting your assets during a Chapter 7 filing. In a Chapter 7 bankruptcy, unsecured creditors like credit card companies, hospitals, and collection agencies are paid through the liquidation of your non-exempt assets. Fortunately, there are specific laws (bankruptcy exemptions) in each state and on a federal that protect a large portion of your assets from being sold.
What is the purpose of having these protections?
The goal of bankruptcy is to provide a “fresh start” for consumers who are overwhelmed by their debts. In order to truly get a “fresh start” one must have a foundation from which to build on. By allowing debtors to keep their property and possessions, this is made possible.
What assets are typically protected?
The most common exemptions deal with your residence, a motor vehicle, clothing, a certain amount of savings, your retirement resources, and other basic needs in today’s society.
So my home is exempt from liquidation? That’s great!
Actually this depends on your state. Some states have minimal if any protection in a Chapter 7 (Pennsylvania and New Jersey, for example), and very few states will shield your house in the event you have a lot of home equity (Texas, Florida, Oklahoma, Arkansas, and Iowa being exceptions for the most part).
What is home equity?
Home equity refers to the dollar amount of ownership you have in your property. For example, if you took out a mortgage for $200,000, have paid off $150,000, and the value of the home has increased by $10,000, your equity or ownership would be $160,000 (assuming you had no down payment).
How does the equity you have in your property relate to bankruptcy?
When you file bankruptcy, the courts will calculate how much equity you have in specific pieces of property, compare it to the state or federal bankruptcy exemptions, and determine whether they are supposed to liquidate those assets to pay back your unsecured creditors.
What happens if my equity is above the bankruptcy exemption?
If the equity you have in a specific asset is above the allotted amount for that type of property, the court may liquidate it and from the proceeds of the sale, the court will pay you your exemption amount first and then from whatever is left over is divided evenly amongst your unsecured creditors.
Are there any cases when the equity you have in a piece of property is above the exemption, but the court still does not force the sale of that property?
Yes, when the equity you have is not substantially more than the exemption, it is possible that the courts will allow you to keep the asset. The underlying principle and cut off is if there will be nothing left after accounting for paying you your exemption amount and the cost of the sale, the courts will allow the debtor to keep the property.
Where can I find resources about my state’s laws?
Information About Bankruptcy
I heard that some states allow you to choose which exemptions you want—the state’s or the federal government’s. Is this true?
Yes. The following states allow you to choose between the state and federal exemptions:
Arkansas
Connecticut
Washington D.C.
Hawaii
Massachusetts
Michigan
Minnesota
New Hampshire
New Jersey
New Mexico
Pennsylvania
Rhode Island
Texas
Vermont
Washington
Wisconsin
Has the new bankruptcy law had any affect on the protections available?
Yes. It has had a profound impact on debtors who have moved to a different state during the time prior to filing bankruptcy. Under the old law you filed wherever your legal residence was. With the new law, however, if you move to another state in the last three years and four month prior to filing, your homestead exemption is limited to $136,875. For other property exemptions, unless you have been a state resident for at least two years before filing, you must use the laws from the state you used to live in.
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