People who file for bankruptcy need to keep some of their property to maintain their lives and function as productive members of society. For example, they need to keep their clothing to go to work or school.
Bankruptcy exemptions allow people to keep certain essential property and not turn it over to the bankruptcy trustee, who otherwise could seize it and sell it. The bankruptcy trustee can take a certain property, sell it and use the money from the sale to pay back creditors to whom the debtor owes money.
Both federal and state laws designate certain assets as exempt. The laws also set a value limit for the exemptions. Most states require a person filing for bankruptcy to use the state exemptions. There are federal bankruptcy exemptions also, and some states give debtors a choice between the federal and state exemptions. The law does not allow the two versions to be combined. Utah requires its citizens to use the Utah state bankruptcy exemptions.
State exemptions are quite different from each other. For example, Colorado allows an exemption of up to $25,000 for “[h]orses, mules, wagons, carts, machinery, harnesses and tools of the farmer.” New York allows an exemption for a person’s pet and their pet food. There are, however, some exemptions that all states allow, although the limits on the value of the exemptions may be quite different in different states.
Exemptions come into play, but work somewhat differently in Chapter 7 and Chapter 13 bankruptcies, the two most common types of bankruptcy for average consumers.
What Are Chapter 7 Bankruptcy Exemptions?
Chapter 7 bankruptcy allows a person to cancel many unsecured debts that the person can no longer pay. As soon as a person files for Chapter 7 bankruptcy, a court order stops creditors from taking action to collect their debts, including repossessing the person’s property.
The bankruptcy court takes possession of the debtor’s property after the debtor files their bankruptcy petition. Exemptions protect the property identified in the petition from this process. A court-appointed trustee sells assets that are not exempt. The proceeds of the sale go to pay off the creditors.
Chapter 7 is called “liquidation bankruptcy,” because the property of the debtor, except for exempt items, is liquidated or converted to cash to pay off the debtor’s debts to the extent possible. This is why exemptions are so important.
Of course, there are exceptions to the exemptions. For example, many states allow a wild card exemption to be applied to any item. It can even be added to another exemption to increase its value. For example, a debtor can use the wild card to make up the difference between the state’s motor vehicle exemption limit and the equity a person has in their car.
Also, if a person does not use the total homestead exemption to exempt the equity in their home, or if they use only part of it to cover their home equity, they can apply it, or any remaining part of it, to any other property of their choice, such as a car.
Part of the Chapter 7 bankruptcy process is a meeting with the court-appointed trustee and creditors after the debtor has filed their petition, which includes their exemption claims. If no creditor objects, the exemptions become final a month after that meeting.
What Are Chapter 13 Exemptions?
In a Chapter 13 bankruptcy, the debtor may be able to keep all their property. They will devise a plan for reorganizing their debt that lasts from three to five years. If the debtor fulfills the plan and makes payments to their creditors regularly as promised in their plan, then they keep control of all of their property.
So, for example, if a debtor is at risk of losing their home to foreclosure, filing a Chapter 13 bankruptcy petition stops the foreclosure. The debtor gets to keep their home as long as they make all future mortgage payments under the Chapter 13 debt reorganization plan.
Chapter 13 bankruptcy is the choice for people with a heavy debt load whose income is too high to qualify for Chapter 7. In addition, their total debt has to be below a maximum total of just below $400,000 in unsecured debt and $1 million for secured debt.
The debt reorganization plan is based partly on the income the person has left after paying the bills for living essentials. This remaining amount is the debtor’s “disposable income.”
As for Chapter 13, exemptions are the same as those available under Chapter 7, but they are used differently. They are used to determine how much each monthly payment is in the debt reorganization plan.
The repayment plan is based on the total value of the property that is not exempt from bankruptcy and the debtor’s disposable income. The more exempted assets, the lower the value of the debtor’s non-exempt property. That number, the value of a non-exempt property, is used to help establish the amount the debtor would pay their creditors.
The non-exempt total is divided by the number of months, between 36 and 60, in the debtor’s repayment plan to yield the monthly payment amount. So, the higher the non-exempt value is, the higher the value of the monthly payment amount. Of course, the debtor wants to keep the monthly payment amount as low as possible.
What Exemptions Are Available in Utah?
Below are some exemptions available to debtors filing for bankruptcy in Utah. Utah law requires people who have lived in the state for at least two years to use Utah exemptions and not federal bankruptcy exemptions, so state law defines the available exemptions. A person wants to consult a bankruptcy lawyer to determine the specifics of each exemption and which exemptions are available to them.
Utah allows married couples to file their bankruptcy petition jointly, and co-owners of property are subject to an exemption to double the value of the exemption. For example, single filers in Utah may be exempt up to $1,000 in total value for dining room and kitchen tables and chairs. As a result of the “doubling” rule, married couples who file a petition jointly can exempt these items up to a value of $2,000.
It is important to note that doubling the value of an exemption applies only to marital property and not to the separate property of one of the spouses. This should be kept in mind as the exemptions below are reviewed:
- The homestead exemption for equity in real property used as a residence:
- Up to $42,000 of equity in a primary residence. Married filers who jointly own their home can claim $84,000;
- Up to $5,000, $10,000 for joint owners/filers, in other real property;
- Equity in an automobile: Up to $5,000 in one motor vehicle;
- Personal property:
- Up to $1,000 for clothing;
- Up to $1,000 for musical instruments, domestic and farm animals, and books;
- Up to $1,000 for kitchen and dining room tables and chairs;
- Up to $1,000 for other furniture;
- Up to $1,000 for heirlooms;
- $250 in firearms per person, up to $500 total;
- Major household appliances, i.e., a refrigerator, stove, a washer/dryer;
- Food to last one year;
- Bed, bedding, and carpets;
- A burial plot;
- Family portraits and art made by family members;
- Proceeds from the exempt property;
- Tools for a Trade:
- Up to $5,000 for tools used in a profession, professional books, and implements;
- National Guard property;
- Unpaid earnings of as much as 1/24 of Utah’s median income if paid more than once a month;
- Unpaid earnings of as much as 1/12 of Utah’s median income if paid monthly;
- The cash surrender value of the life insurance policy minus payments made in the last year;
- Life insurance proceeds if paid to a spouse or dependent if needed for support;
- Fraternal benefits society benefits;
- Benefits paid for disability, medical treatment, hospitalization, or illness;
- Pensions and retirement:
- Tax-exempt retirement benefits;
- Other pensions and annuities as needed for support;
- Public employee pensions;
- ERISA-qualified benefits, IRAs, Roth IRAs, if the benefits have accrued or the contributions were made at least 12 months before filing;
- Public benefits:
- Alimony and child support:
- Personal injury or wrongful death recovery from someone on which the debtor depended for support;
- Business partnership property;
- Higher education savings plans, but not more than $200,000 aggregate and not including payments made during the 18 months immediately before filing
This list is not complete. There are other exemptions. Bankruptcy exemptions are important, so a person wants to consult an experienced Utah bankruptcy attorney before preparing their petition so that they are sure to claim all of the exemptions that are available to them.
Do I Need a Bankruptcy Lawyer?
Due to the complicated nature of bankruptcy, it is a good idea to speak with a Utah bankruptcy attorney before you file. Incomplete or inaccurate filings may result in the loss of property that might have been exempt.
In addition, a person wants to choose the right type of bankruptcy. You want to protect yourself by consulting someone familiar with Utah laws and exemptions who knows how to protect your assets from creditors.