In bankruptcy, a person who files seeking relief from their debts is called “the debtor”. The debtor may have to sell some of their property in order to pay off creditors to whom they owe money. Bankruptcy law, however, allows the debtor to keep certain specific items of property. These items that do not have to be sold to pay creditors are called “exemptions”.
Most average consumers would be interested in two kinds of bankruptcy, Chapter 7 and Chapter 13. In a Chapter 7 bankruptcy the court trustee oversees the sale of the debtor’s assets and the proceeds are used to repay the debtor’s creditors. However, only nonexempt assets are eligible to be sold. The debtor is allowed to keep exempt items.
Chapter 13 bankruptcy is for debtors who are able to make monthly payments on their debts over a period of 3 to 5 years. A Chapter 13 debtor’s assets are not sold to pay creditors; however exemptions still play a role in a Chapter 13 bankruptcy.
The amount of a debtor’s monthly payments depends in part on the value of the debtor’s assets. Some assets are exempt from the calculation of the monthly payments. So there are exemptions in Chapter 13 bankruptcy.
In most states, debtors must use the exemptions defined by their state’s laws, even though bankruptcy is otherwise a matter of federal law. In some states, debtors can choose between their state’s exemptions and a different list of exemptions from the federal Bankruptcy Code.
The State of Hawaii allows its residents to choose between the federal and state exemptions. A person who files for bankruptcy in Hawaii may choose between the Hawaiian exemption system detailed below or the federal exemption system.
However, the debtor may not pick and choose between the systems. For example, a debtor cannot choose the Hawaii homestead exemption, and other federal exemptions. The debtor must use either all the Hawaii exemptions or all of the federal exemptions
A lawyer should be consulted to determine the details of each system of exemptions, state and federal, and to determine which system is best for a particular situation. A Hawaii bankruptcy lawyer also knows all available exemptions that may be claimed.
What Is Exempt Property?
There are a number of types of bankruptcy exemptions. They are mostly the same for both federal and state bankruptcy. In general, exemptions protect a debtor’s property up to a certain value; if a value is not stated, then the property is fully protected.
- Personal property: This exemption protects personal items, usually those which are either necessities or those which might have sentimental value. Examples are clothing, ordinary household furnishings such as a TV, computer, bedding and the like;
- Motor vehicle: This exemption protects your main form of transportation, for example, a car or pick-up truck;
- Retirement accounts and pensions: This exemption protects retirement savings and a debtor’s pension;
- The Homestead exemption: this exemption protects the house in which a debtor lives.
What Are Hawaii Bankruptcy Exemptions?
Again, the State of Hawaii allows its residents to choose between the federal and state exemptions. Citizens who file for bankruptcy in Hawaii may choose between the exemption system listed below or the federal exemption system. It would be best to consult an experienced bankruptcy lawyer who is familiar with the pros and cons of each system before making a choice. A debtor cannot pick and choose among them, but rather must choose one entire system or the other.
The exemptions in Hawaii are as follows:
The Homestead Exemption: the debtor’s equity in a primary residence is exempt up to a certain value. Equity is the value of the property minus the amount of any debt that is owed. So, for example, if the value of a house is $100,000 and the owner owes a mortgage on the house of $70,000, then the debtor’s equity is $30,000.
- An exemption of up to $30,000 can be claimed, if the debtor is 65 years old or the head of a family; the property must not exceed one acre;
- An exemption of up to $20,000 can be claimed, if the debtor is not 65 years old or the head of a family; the property must not exceed one acre.
- Married couples may not double the value of the exemption..
The Motor Vehicle Exemption: the value of the debtor’s interest in one automobile is exempt up to $2,575;
The Personal Property Exemption: The items of personal property specified here are exempt:
- All appliances, home furnishings, clothing, and books used by the debtor or debtor’s family;
- Up to $1000 in jewelry and watches;
- Proceeds from the sale of personal property for six months after sale;
- Proceeds from cashing in an insurance policy for six months after the cash-in date;
- Partnership interests in businesses;
- One burial plot, up to 250 square feet.
Tools of the trade: This exemption covers tools that the debtor needs to earn a living from a trade, business or profession:
- Tools, instruments, uniforms, books, equipment, and any other personal property ordinarily and reasonably necessary to trade, business, or profession;
- One commercial fishing boat and net;
- One motor vehicle.
Insurance: This exemption covers insurance policies and proceeds from insurance coverage:
- The benefits from accident, health, or sickness insurance;
- Life insurance proceeds but only if the text of the policy prohibits the proceeds from being used to pay the beneficiary’s creditors;
- The benefits from a life or health insurance policy for a spouse or child;
- Proceeds from an annuity contract or endowment policy for which the beneficiary is the insured’s spouse, child, or parent;
- Fraternal Benefit Society benefits;
- LIfe insurance proceeds if the text of the policy prohibits use of the proceeds to pay the beneficiary’s creditors;
- Group life insurance proceeds.
Pensions: This exemption covers retirement savings, public employee pensions and qualified retirement plans under the Internal Revenue Code:
- ERISA-qualified retirement accounts and IRAs in full;
- Firefighters’ pension.
- Police officers’ pension.
- Public officers’ and employees’ pension.
- Any other rights under any retirement plan qualified under the Internal Revenue Code.
Public benefits: Most public benefits are exempt:
- Workers compensation
- Public assistance
Alimony and child support: Some portion of alimony and child support are exempt:
- The amount reasonably necessary for support of the debtor and dependents.
Wages: Some wages are exempt, specifically:
- Unpaid wages earned in the 31 days before the debtor files for bankruptcy;
- Prisoners’ earnings that are held by the state.
Are There Any Other Bankruptcy Considerations in Hawaii?
One last exemption that is available to residents of Hawaii is the wildcard exemption. The wildcard exemption is different from other exemptions because it can be applied to any type of property.
There are two ways to use the wildcard exemption. A debtor can use it to protect an asset that does not qualify for any other exemption. First, you can use it to protect an asset that does not have a specific exemption to cover it, such as the Christmas china that the debtor inherited from their grandmother or something that has sentimental value but not much objective value.
Another option is to use the amount of the wild card exemption with the value of another exemption to fully protect one asset. For example, you might have more equity in a car than is protected by the motor vehicle exemption. A debtor can combine the wildcard exemption with the motor vehicle exemption, to fully protect their equity in their car.
The wildcard exemption can cover a few different types of property. However, it does not cover a large value, so a debtor more often will use it on only one asset. Strategizing how to use a wildcard exemption can be complex because of the wide range of options. A debtor may want to consult a Hawaii bankruptcy lawyer to make sure that they understand the exemption and the options for using it.
Do I Need a Hawaii Bankruptcy Lawyer?
Understanding exemptions such as the wildcard exemption can be complicated. That is why it is wise to consult an experienced Hawaii bankruptcy attorney. An experienced bankruptcy attorney can advise you of all the available options and how to best make use of them in your case.
Exemptions are only one reason to consult a Hawaii bankruptcy attorney for professional help before deciding to file for bankruptcy. The entire bankruptcy process can be technical and complicated. It is best to have a knowledgeable attorney advising you from start to finish.