When you file bankruptcy, your property and debts are subject to the jurisdiction of the bankruptcy court. These assets and debts are referred to as the “debtor’s estate.”
The estate includes the debtor’s (your) interest in all property, including the debtor’s interest in community property that is under the debtor’s management and control. Also included is property the debtor acquired within 180 days after filing, such as an inheritance, marital settlement property, or proceeds from a life insurance policy.
The bankruptcy court also has jurisdiction over any property the estate acquires after filing bankruptcy.
There are two categories of assets:
There are two categories of debts:
The assets of an individual debtor that are under the jurisdiction of the bankruptcy court include:
The court recognizes that the debtor (you) needs certain items to live and start a new financial life. Therefore, the court allows the debtor to keep certain assets, which are referred to as exempt assets. Both federal and state laws provide a list of assets determined to be exempt.
The following types of property are excluded from debtor’s estates in bankruptcy:
Both Federal and State law lists assets that are exempt from the jurisdiction of the bankruptcy court and may be retained by an individual debtor in Chapters 7 and 13 cases.
In Chapter 7, all property must be surrendered to the trustee unless allowed to be retained by a bankruptcy exemption. In Chapter 13, as a condition of plan confirmation, creditors must receive value at least equal to or greater than would be distributed if the case had been liquidated in a Chapter 7 proceeding. Plan confirmation depends on individual bankruptcy exemptions to pass this test.
Using federal or state exemptions depends on the state in which the debtor lived for the two-year period before filing.
Debtors who are husband and wife (joint debtors) may double the exemptions listed. However, joint debtors must choose the same exemptions if they have a choice. For example, in states that allow a choice between federal and state exemptions, one debtor cannot choose the federal exemptions while the other debtor chooses the state exemptions. If the joint debtors cannot agree on the exemption schedule to use, they will be deemed to choose the federal exemption schedule. Additionally, a debtor may not choose some federal exemptions and some state exemptions.
Some retirement funds are exempt regardless of whether state or federal exemptions are elected.
All assets must be included on the debtor’s schedule of assets and indicate their exempt status when appropriate. If an exempt asset erroneously is not listed as such, the asset may be determined to be nonexempt and thereby subject to the trustee’s sale or disposition. If the debtor fails to claim the exemptions within the time specified, a dependent of the debtor may file the exemptions within 30 days thereafter.
Federal law allows exemption for the debtor’s interest in:
Every state has its own set of bankruptcy exemptions. Items covered and the values of items vary greatly from state to state. In some states, the debtor has a choice of state or federal exemptions, and in others the debtor must use the state exemptions.
If a husband and wife (or two or more persons) are filing jointly, they must choose the same exemption schedule and may not alternate between state and federal schedules.
The bankruptcy process is full of pitfalls and complexities for the unprepared. By hiring the right attorney, you can help yourself get through a difficult process as easily as possible.