One of the biggest mental obstacles people face when filing for bankruptcy is the fear they will lose their home or other property. But the bankruptcy process is designed to help give debtors a “fresh start,” not leave them without the ability to rebuild their lives. To that end, federal and state law provide for a wide range of “exemptions,” that is, property that a debtor can keep out of the bankruptcy process and away from their creditors.
The Chapter 7 Process
First, it is helpful to understand how a Chapter 7 bankruptcy works. The basic idea is that after you file a Chapter 7 petition with a federal bankruptcy court, the judge appoints a “trustee” to oversee your bankruptcy estate. The bankruptcy estate, in turn, is composed of any property you have that is not specifically exempt.
Now, in many Chapter 7 cases, there is no non-exempt property. This means that the debtor keeps all of their property and the creditors take away nothing from the bankruptcy. But if there is non-exempt property, the trustee is required to liquidate it and use the money to pay back the creditors as much as possible. (If the debtor has sufficient resources, they can attempt to “buy back” a non-exempt asset from the trustee.)
Whether there is a liquidation or a “no asset” bankruptcy estate, the final outcome is the same: The bankruptcy court issues a discharge. This is a legal order releasing the debtor from any further obligation to repay their creditors. This order also forbids the creditors from taking any further collection action on the debts.
So How Much Can I Actually Keep?
Bankruptcy is governed primarily by federal law. But when it comes to exempt property, state law often plays a role. Essentially, the federal Bankruptcy Code creates a default set of property exemptions. Individual states, however, can create their own exemptions and require their residents to use them instead of the federal list.
In Iowa, for example, the state exemption list is mandatory. Fortunately, it is a fairly generous and comprehensive list. Here are just some of the highlights:
Your primary residence is called your “homestead.” Iowa exempts the full equity value of a house or apartment used as a homestead, although there are certain acreage limits for the property. This is actually quite a generous and important exemption, given that the federal government and many states limit the equity value of a homestead for bankruptcy purposes.
Also note that neither bankruptcy nor the Iowa exemption eliminates a lender’s interest in your home under a mortgage. That is to say, while you can eliminate your obligation to repay your mortgage under Chapter 7, the lender can still foreclose on your house even after the bankruptcy is completed.
Iowa allows an exemption of up to $7,000 for a single motor vehicle. So what if your car is worth more than $7,000? In that case, the bankruptcy trustee may force you to sell the car and you would receive $7,000 back. And as with a home mortgage, if your car was purchased with a loan, the lender could still take action to repossess the vehicle post-bankruptcy.
Wages and Benefits
In terms of your income, there are various exemptions in place to protect a debtor’s income. Up to $1,000 in “accrued wages” are exempt, which may include certain tax refunds. A debtor may also exempt up to 75 percent of their “disposable earnings,” which is basically your wages less certain legally permitted deductions.
Additionally, there are many types of government and private benefits–such as unemployment compensation and retirement accounts–that are considered fully exempt.
Call a Bankruptcy Attorney to Learn More
This is only a brief overview of the bankruptcy exemption process. Many people are actually quite surprised to learn how much property they are allowed to keep during the Chapter 7 bankruptcy process. So if you would like to learn more from a qualified Council Bluffs, Iowa, bankruptcy lawyer, contact the Telpner Peterson Law Firm today to schedule a consultation.