Filing for bankruptcy is a way to manage overwhelming debts and reclaim your financial future. One form of bankruptcy is a Chapter 7 filing, which is available to low-income filers. It is informally known as liquidation bankruptcy. This is because the bankruptcy trustee assigned to a filer’s case has the option of using proceeds from the sale of certain assets that aren’t exempt from bankruptcy to pay off debts.
For the vast majority of people who are filing for Chapter 7 bankruptcy, there aren’t enough exempt assets to warrant the trustee making the effort it would take to liquidate them to pay creditors. Still, it’s important for you to understand exemptions so you can determine if Chapter 7 is a good option for you.
Exempt versus non-exempt property
Property that’s exempt can’t be claimed by a trustee. Assets that are exempt may have specific monetary limits. Any value over the set limits may potentially be taken by the trustee. Some examples of exempt property include a certain amount of equity in a primary home, motor vehicles, retirement accounts, pensions, certain clothing and jewelry, tools you need for work and public benefits.
Non-exempt property can be claimed by the trustee, although this is unlikely to occur. Vacation homes, bank accounts, expensive instruments, collectable items and vehicles beyond the primary vehicle may be considered for liquidation. Yet, there may be a wildcard exemption that can be used to cover the value of some non-exempt assets or value of exempt assets that exceeds specific monetary limits.
Federal versus state exemptions
In Pennsylvania, you have the option to choose between using federal bankruptcy exemptions or Pennsylvania’s state-specific exemptions. You can’t mix and match, so you must choose one set of exemptions. Federal exemptions tend to be more generous in some areas, while state exemptions might offer better protection for other types of property. Your choice should be influenced by the types of assets you want to protect.
Discussing your circumstances with a legal representative who can assist with determining how to proceed is likely going to be wise. They can offer guidance to better ensure that whatever path to debt relief you pursue, it reflects your best interests.
