Bankruptcy Exemptions are the laws that allow you to keep assets in a Chapter 7 Bankruptcy
The most common type of bankruptcy is a Chapter 7 bankruptcy, aka a liquidation bankruptcy. The process usually takes approximately three to four months for a standard case. During this process you file a petition that provides information about your life. This information includes your income, expenses, debts, assets, and personal information. The bankruptcy process allows you to keep certain items. If you have more then the minimal items the bankruptcy trustee sells the debtor’s nonexempt assets and uses the proceeds of such assets to pay creditors. Understanding bankruptcy exemptions can help you determine the right debt management option for you. Virginia bankruptcy exemptions can be fairly generous, but there are limits. The most significant limit for debtors are the ability to protect real estate.
Who can file
Chapter 7 is an option for individuals or businesses. An individual gains fresh financial start after filing a Chapter 7 — only select debts remain after discharge. A business uses a Chapter 7 to close the business after it is no longer profitable.
How to qualify
When a debtor files Chapter 7, the court looks at the household income. If the household income is below the median for your state, you can qualify for Chapter 7. If your household income is above the median income for your state, you may still qualify. The court analyzes all income under the “Means Test.” This test is basically used by the court to determine if you have any disposable income at the end of every month to pay over to your creditors. The court determines the disposable income by deducting specific monthly expenses from your “current monthly income” (your average income over the six calendar months before you file for bankruptcy). Some of these expenses are actual expenses, such as car payments, mortgage payments, taxes, etc. Other expenses are based on the Internal Revenue Service standards for your county, such as utilities, food, etc. The expenses that apply to the analysis are adjusted annually and the income for qualification is adjusted twice a year.
Exemptions
When filing a Chapter 7, most people are most concerned about what assets you can keep. There are certain bankruptcy exemptions (or protections) that apply to anyone filing for bankruptcy. Your exemptions vary under state and federal laws. The exemptions you can use depend on state law and where you have resided for the past two years.
In Virginia, there are various exemptions that apply for residents who file for bankruptcy. Some of the most common exemptions include:
Homestead/Primary Residence: Each debtor can protection up to $25,000.00 of equity in their primary residence or a property where his/her dependent resides. A married couple that own a property together can exemption $25,000.00 each in the property. This protection is after cost of sale and payment of any mortgages (or similar, like HELOCs) against the property. The Virginia legislature only created this exemption to go in effect on July 1, 2020. Prior to 2020, a debtor in bankruptcy had limited ability to protect equity in a house with either the Wildcard or Tenants by the Entirety (see those two exemptions explained more below).
Clothing: up to $1,000 of the value of clothing. Used clothing have a very low resale value; we use thrift store prices to value clothes. The only issue that ever arise are if there are a significant amount of newer designer clothes.
Vehicles: each debtor may keep up to $6,000.00 in equity in a car. If a car is jointly owned, this means a couple can have up to $12,000.00 worth of equity in the car. This means that if you have a car worth $20,000.00, but there is a $18,000.00 loan on the vehicle, there is only $2,000.00 worth of equity.
Household good and furnishings: each debtor can keep up to $5,000.00 on household goods. Generally, there is no issue with these items unless you have valuable antiques or collectibles.
Wedding and engagement rings: debtors are allowed an unlimited exemption for wedding and engagement rings. This means there is no limit on the value you can have for an engagement and/or wedding ring.
Tenants by the Entirety: there is an unlimited exemption for property titled Tenants by the Entirety (TBE) when there is no joint, unsecured debt between the spouses. In Virginia, the law allows property (most commonly a marital home) to be titled in a specific manner between a married couple, but also requires that no joint unsecured debts exist between the parties. If you think this may apply to you, then I recommend speaking to an experienced bankruptcy attorney. Steps have to be taken to ensure there is no joint debt and that needs to be proven to the trustee in your case. Ensuring the the property is also titled correctly will be important. TBE cannot apply to vehicles, but can apply to multiple properties. In rare circumstances, it may also apply to bank accounts.
Federally-qualified retirement plans: traditional retirement plans, such as your 401(k), IRS, Thrift Savings Plan (TSP), etc. are all 100% exemption.
Firearms: each debtor can keep up to $3,000.00 in firearms.
Tools of the trade: there is a $10,000.00 exemption for assets that are directly related to your primary profession. This, for example, can be use for hand tools if you are a carpenter, a computer if you are an IT professional or your car if you are an UBER driver.
Family heirlooms: each debtor can protection up to $5,000.00 in family heirlooms or family portraits. Proving a family heirloom may be difficult, but it could cover things like jewelry passed from generation to generation or a grandfather clock.
Wildcard: Virginia bankruptcy exemptions are generous for everything exception a potential wildcard. A wildcard applies to any asset that has no other exemptions available, including cash in the bank and or various jewelry (other than wedding and engagement rings). A debtor may also use this exemption to supplement any other exemption if more protections are needed. It is commonly stacked with the Homestead/Primary Residence exemption.
Virginia’s wildcard is also called a Homestead Deed; it has this name because a previously a document must be filed in the land records in the county in which you reside. This exemption is a $5,000.00 exemption that can be used in and out of bankruptcy against creditor collections. Since it can be used in and out of bankruptcy, it renews every eight years. If you use this exemption outside of bankruptcy (for example, to get garnished funds back), you still must file a Homestead Deed with the court where the action is taking place and it will limit any wildcard exemption you may use if you file bankruptcy within the next 8 years. Debtors receive additional $500.00 exemption for any dependents. The exemption increases to $10,000.00 at the age of 65. There is also an additional $10,000.00 of a wild cad that is given to any disabled veteran (with a disability rating of over 30% by the Veterans Administration).
NOTE: The above list of Virginia bankruptcy exemptions is NOT complete or exhaustive list. It includes only the most common exemptions. Additionally, these exemptions may change.
Warnings about assets, exemptions and transfers
It is also important to note that transferring assets to avoid including them in your bankruptcy is a bad plan. All transfers of property within two years of filing bankruptcy must be disclosed. The court may review transfer of assets even further back given the right circumstances. The case trustee can reverse transactions. If the court determines you did the transfer with the intend to avoid a bankruptcy or to hide assets from creditors, the court may also deny you a discharge of your debts.
The court may review all debts that a debtor paid back within the last year. If you have paid back family, friends, or business partners, the court can actually sue those individuals for return of the funds. The court believes that a debtor must treat all creditors the same; as a result, you must treat American Express the same as Uncle Joe. Paying one creditor more money than another is considered a preference because you are giving preferred treatment to one creditor over another.
Once a Chapter 7 bankruptcy is filed, you cannot voluntarily dismiss the case. A judge must review any request to end a debtor’s case. A judge will not dismiss your case just because a debtor is losing property or a trustee sues a debtor’s family member.
An experienced Virginia bankruptcy attorney will be able to review your situation and help prevent potential problems in your case. Having an lawyer handle your case properly from the start can prevent problems later on.
Alternative options
If Chapter 7 is not right for your situation, there can be other options. Many people who qualify for Chapter 7 due to their income, choose to file a Chapter 13 because there are not adequate bankruptcy exemptions to protect all of their assets. If you have nonexempt assets, a Chapter 13 is another option to consider. In a Chapter 13, you are allowed to keep all nonexempt assets because debtors are required to pay out the value of these unprotected assets over the course of three to five years. Additionally, sometimes debt negotiation is a better option. If you have limited amounts of debt or cannot qualify for a Chapter 7, sometimes having an attorney help you settle a debt, is a better option.
Most individuals want to keep as many assets when possible, if you are filing bankruptcy. Having an experienced bankruptcy attorney can help ensure your case goes smoothly and can help protect as many assets as possible. Attorney Ashley Morgan has experience dealing with all the above issues.