Bankruptcy refers to a type of legal proceeding in which a person or a business can resolve certain debts with creditors. This process provides debtors with a sort of fresh financial start while simultaneously helping creditors to establish their rights on certain claims. Generally speaking, creditors are not to collect on debt amounts once bankruptcy has been filed.
They are to wait until the bankruptcy process is completed in order to resume any and all collection efforts. This is known as an automatic stay. An automatic stay is partially initiated due to the fact that debt payment terms are commonly reevaluated and reorganized during the bankruptcy process.
Exempt property refers to any property that cannot be claimed by creditors in order to satisfy the borrower’s debts. Non-exempt property refers to any other property that may be reached by creditors. It is important to note that what actually constitutes exempt and nonexempt properties may vary from state to state.
An example involving exempt property would be when a homeowner has failed to maintain their mortgage payments. If the debt gets serious enough, the lender may file a lawsuit against the borrower in an attempt to repossess their assets in order to satisfy the debt repayment. In such a lawsuit, the creditor cannot collect exempt property. This usually includes household items, as well as the physical house itself. However, the creditor may be allowed to place a lien on the non-exempt items.
What Are Some Examples of Non-Exempt and Exempt Property?
Exempt and non-exempt property classifications are most commonly applied in a Chapter 7 liquidation bankruptcy case. In a Chapter Seven bankruptcy claim, the debtor could be required to forfeit some of their property. This is done so that it may be sold, with the proceeds going towards their debt payments.
In such cases, certain property will be classified as non-exempt and other properties will be classified as exempt. Such designations are also known as bankruptcy exemptions. Once again, non-exempt property can generally be claimed by a creditor; and, these designations can vary by filing, as well as state law.
Federal bankruptcy law allows each state the discretion to determine which assets a debtor may keep when a bankruptcy case is filed. A state may allow a debtor to choose between federally-created exemptions, as defined in 11 U.S.C. 522, or state-created exemptions. Alternatively, a state may limit a debtor to only the state-created exemptions. A debtor can use the exemptions from only one statute, either the federal or the state, but not both. In states that provide more than one exemption statute or system, the debtor may use the exemptions from only one statute.
Some examples of exempt assets for Chapter Seven purposes include, but may not be limited to:
- Necessary and essential items, such as clothing, furnishings, and household goods and appliances up to a reasonable amount;
- Some motor vehicles up to a certain specified value;
- Jewelry up to a certain specified value;
- Tools or instruments essential to a person’s trade, up to a specific amount;
- Some unpaid but earned wages;
- Pensions; and/or
- Benefits, such as social security, welfare, and unemployment if those benefits are held in a bank account.
Some examples of non-exempt assets for Chapter Seven purposes include, but may not be limited to:
- Bank account funds;
- Securities, such as stocks and/or bonds;
- Valuable items, such as coin or stamp collections;
- Musical instruments, unless the debtor is a professional musician;
- Second homes;
- Vacation property; and/or
- Second motor vehicles.
What if a Creditor Is Trying to Claim my Exempt Property?
In some cases a creditor may attempt to claim a debtor’s exempt property. This most commonly results over the classification of property as non-exempt. In such cases, the debtor must prove that the property is, in fact, exempt. Additionally, they must prove that the creditor has no legitimate claim to it.
An example of this would be if the value of a particular item cannot be easily determined. It could also involve a complex analysis of the property, as well as bankruptcy laws specific to the debtor’s jurisdiction. Should the debtor be successful, they could obtain a court ordered injunction. This injunction would require that the creditor cease their collection efforts. If the creditor has caused the debtor significant losses, the debtor may also be able to obtain a damages award for reimbursements.
Once again, the bankruptcy code allows debtors to claim certain property as the debtor’s exempt property. If property has already been claimed as exempt property then the property is off limits to creditors. Typically, creditors have up to 30 days after a debtor claims property as exempt, to file an objection. Creditors objections to exemptions are discussed at the 341 meeting of creditors.
At the 341 meeting, if no objections are filed by creditors then the property will become exempt 30 days off the meeting. Thus, the best steps to take for a person to protect their property is to carefully review the bankruptcy laws in their jurisdiction and decide which property to claim as exempt from the bankruptcy state. There are also other ways to protect one’s property through the use of trusts or gifts.
What Legal Remedies Are Available?
Once again, a bankruptcy proceeding is commenced by a debtor or creditor, and ends with a Court entering a judgment that the debtor is bankrupt. Once the judgment is entered declaring the debot to be bankrupt, there are not many options available to creditors to collect on their debt. Thus, the most common action that occurs during the bankruptcy is negotiation between debtor and creditor.
However, there are many different prejudgment remedies available to creditors. One of the most common prejudgment remedies is foreclosure. A foreclosure is a judicial action in which property is auctioned off to repay the creditor’s debts. Another common remedy is self-help. Self-help is where the creditor does not seek the court’s assistance and simply goes and repossesses the property from the debtor.
However, if the debtor asks the repossessor to go away, they must typically stop their repossession efforts. When self-help fails, a creditor will typically go to court and seek out a judgment against the debtor. Thus, if you are a creditor, you should develop a plan to handle collecting the debt, such as self-help, negotiation, or seeking out a judgment.
In cases where there has been a violation regarding exempt property in a bankruptcy proceeding, a creditor may obtain a judgment from the court to repossess that property, or be awarded a judgment for the debt amount plus attorney’s fees.
Should I Contact a Bankruptcy Lawyer for Assistance with Exempt Property?
As can be seen, bankruptcy is a very complicated process and requires a thorough knowledge of each state’s bankruptcy law. Thus, if you are going through the bankruptcy process it is important to consult with a well qualified and knowledgeable bankruptcy lawyer. An experienced bankruptcy lawyer will know your state’s laws regarding exemptions and the proper means of claiming the exemptions.
Once again, if an exemption is not properly filed and claimed, that property may be subject to seizure by a creditor. In addition to filing exemptions, an experienced and local bankruptcy attorney will be able to help you determine which chapter of bankruptcy is right for you. The attorney will also be able to help you file for bankruptcy, file the correct forms, and represent you at any necessary hearings and the 341 meeting.