When filing Chapter 7 Bankruptcy, you are allowed to keep some or all of your assets. How much you can keep of any kind of asset is known as an “exemption”. Simply stated, an exemption is the total value of any asset that is “exempt” from the bankruptcy trustee and your creditors. More simply stated, it is set aside for you to keep.
In most Chapter 7 filings, you get to keep all of your assets. This is because most bankruptcy debtors assets have a value below the exemption limit. For example, in Massachusetts, the first $7,500.00 in value in your automobile ($15,000.00 for two vehicle is a joint filing) is exempt. A debtor with a car having a value of $7,500.00 or less can keep the vehicle. A debtor having a car with a value of $20,000.00 and an outstanding loan on the car $12,500.00 has “equity” of $7,500.00 in the car ($20,000 – $12,500), and can keep the vehicle.
What if your car is worth $12,000.00? Under the Massachusetts exemption election, you are entitled to a “wildcard” exemption of an additional $1,000.00 that can be used on any property. In addition, you can use up to $5,000.00 of any unused portion of your household furniture, tools and auto exemptions as a further “wildcard” exemption. For example, the furniture exemption of $15,000.00 can be used as a wildcard exemption of up to $5,000.00 (as long as the value of household furnishings is less than $10,000.00). So if your car is worth $12,000.00, you still get to keep it.
Massachusetts provides an automatic exemption for your home equity up to $125,000.00. This exemption can be increased to $500,000.00 by simply filing a Declaration of Homestead at your registry of deeds – the recording fee is $35.00. So if your house is worth $500,000.00, and you have no mortgage, no worries. You get to keep the house. If your house is worth $600,000.00 and you have a $100,000.00 mortgage, your equity is $500,000.00 and fully protected by your recorded Declaration of Homestead. Unlike other exemption amounts, the Homestead exemption does not get doubled for a joint husband and wife filing, unless they are elderly and file a special kind of homestead declaration as such.
Retirement Accounts get excellent treatment under the Massachusetts exemption scheme as they are fully exempt, no matter how large the value, as long as the retirement account is qualified as such under the tax code (e.g. IRA, 401k, pension, etc.). There are limits on how quickly the retirement account can be funded. These limits are to avoid a Debtor taking a million dollars in cash and dumping it into an IRA on the eve of a bankruptcy filing. However, as long as your retirement plan was funded in the normal course of your employment or self-employed work history, the accounts are fully exempt.
There are certain pre-bankruptcy measures that can be taken to maximize exemptions and keep more of your property such as funding your retirement account, paying down your mortgage, or making needed purchases of exempt items prior to filing. Of course there are limits on these measures and exceeding them can jeopardize your bankruptcy and your right to have debts discharged. In short, it is important to consult with a qualified bankruptcy attorney to maximize your exemptions and the financial benefit you receive from your bankruptcy filing.
