Bankruptcy Chapter 7 Exemptions

The availability of bankruptcy chapter 7 exemptions under state and federal law

In 14 states, debtors may select either state or federal bankruptcy Chapter 7 exemptions. In all other states, debtors are limited to state exemptions enacted by the state's legislature. For a full itemization of availability and provisions for all states, see bankruptcy exemptions. These exemptions are not automatic however, and must be specifically claimed in the debtors schedules, and correspond to a specific asset.

In every bankruptcy, Chapter 7 exemptions are reviewed by a Trustee and the Court. If a debtor claims an inappropriate exemption, the Trustee, the Court, creditors, or a party in interest may all file objections. Most often, the basis of the objection alleges an asset is non-exempt and would provide creditors with a greater distribution of assets. These objections are in form of a written motion, which require notice to the debtor and oral argument in the presence of the assigned Judge.

Common problems when claiming bankruptcy Chapter 7 exemptions

Retirement accounts must be included in bankruptcy. Chapter 7 exemptions virtually always identify certain classes of retirement accounts that are exempt, and others that are not exempt. Likewise, bankruptcy Chapter 7 exemptions also identify certain professions (primarily various government employees) that may claim exemptions that are not allowed for the general public. However, problems arise because of the wide assortment of retirement investment options that qualify under both classes (exempt and non-exempt). Predictably, attorneys representing debtors and creditors each interpret the application of law in the light most favorable to their client. To resolve these disputes, hearings are normally required.

Practicality claiming bankruptcy Chapter 7 exemptions

The difference between real value and nominal value may create an added benefit for debtors claiming bankruptcy Chapter 7 exemptions. Trustees and Courts are primarily interested in real value that can be distributed efficiently to creditors. This requires equity value above the cost of seizure, administration and liquidation auction. Further, auction values are typically far below retail value, and also are below the amount a professional seller could obtain if advertising goods and requiring an optimum price.

The effect? Even though a bankruptcy Chapter 7 exemption may not apply, Trustees and Courts are rarely interested in a single bank account with less than $100 because the cost of collection and distribution would not pay for an hour of the trustee's hourly billable rate (trustees are usually attorneys and charge premium attorney rates). Similarly, when goods must be sold at auction, even greater values become nominal in the eyes of Trustees because of the added expense and uncertainty associated with auctions. For more information, debtors should consult a qualified bankruptcy attorney to determine local customs and practices.

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