January 4, 2011 By Greater Boston Law
By Massachusetts Bankruptcy Attorneys
Most people who file Chapter 7 bankruptcy get to keep all of their property. This is because bankruptcy law allows the Debtor to keep different categories of property, either completely or up to a certain value. Under bankruptcy law, these categories of property are known as "exemptions". The amount of property you get to keep in each category depends on whether you elect to take the state or federal exemptions. Not all states allow the Debtor to take the Federal exemption. The following discussion will take two hypothetical Massachusetts Debtors and compare their cases and best exemption option based on their property.
JOHN - MASSACHUSETTS EXEMPTIONS
John has a homestead bought 5 years ago, worth 400,000.00 with a $200,000.00 mortgage on it. He also has a car worth 12,000.00 on which he owes 10,000.00. He has a retirement account with $200,000.00 and savings of $1,500.00. His household furnishings are used and owned outright and his clothing and jewelry are average.
John would elect the Massachusetts exemptions to keep the most property. This is necessary because of the large amount of equity in his home ($200,000.00). Massachusetts exemptions allow the Debtor to keep up to $500,000.00 in home equity. The Federal exemptions would only allow John to keep $21,265.00 of his home equity, John will need to record a Declaration of Homestead in the registry of deeds before filing his bankruptcy in order to get the full exemption.
John's retirement account is fully exempt under the Massachusetts exemption scheme. He gets to keep the $200,000.00 in his IRA. This would be true even if he elected federal exemptions.
John has $2,000.00 in equity in his car. The Massachusetts exemptions only allow $750.00 in equity in an automobile. In theory, the Trustee can sell John's car, pay off the car loan and keep the $1,250.00 left over after paying over to John his exemption amount of $750.00. However, the Trustee must consider costs associated with liquidating the asset, including storage and sale of the vehicle, not to mention the Trustee's time and effort in getting the sale approved by the bankruptcy court. Finally, there is the possibility that the car will not bring its full value of $12,000.00 at a trustee's sale. After all is said and done the Trustee may consider sale of this asset not worth pursuing on behalf of creditors. If the numbers weren't so tight so that the Trustee would be likely to liquidate the car, it is still possible to keep the car. Often, a Trustee will accept a settlement from a Debtor in exchange for not pursuing sale of non-exempt property.
John's $1,500.00 in savings is only exempt under the Massachusetts scheme up to $925.00 (500.00 checking or savings account; $125.00 cash; $300.00 provisions for family). Preserving the $575.00 non-exempt amount is possible by using it for normal living expenses or depositing it into the IRA, although caution is in order here. While it is not improper to convert a non-exempt to an exempt asset prior to filing bankruptcy, the court has discretion to find such a move improper,
MARY - FEDERAL EXEMPTIONS
Mary has a home worth $250,000.00 subject to a first mortgage with a balance of $245,000.00. Her automobile is worth $8,000.00 which she owns outright. Her 401K retirement account has a current value of $100,000.00. She has savings of $10,000.00.
Because her home equity is only $5,000.00, the federal exemptions are sufficient to protect her home equity, This is good news for Mary because in Massachusetts, except for the homestead category, the federal exemption scheme is much more generous. Mary's available real estate exemption is $21,265.00. She only needs to use $5,000.00 of it on her home equity. The remaining unused portion of this up to $10,825.00 can be used to exempt any other property. This will protect the $10.000.00 in her savings leaving $825.00 still unused. Her auto gets an exemption of $3,450.00 under the federal scheme. Since it is worth $6,000.00, $2,550.00 cannot be exempted using the auto exemption. This amount can be covered by the remaining unused portion of her homestead exemption ($825.00). In addition the federal exemption provides a separate "wildcard" exemption of $1,150.00. Since all but $575.00 of the auto is exempt, it is a simple matter for Mary to "purchase' the non exempt portion of her car by paying over $575.00 to the Trustee.
Finally, it is important to remember that the federal exemption amounts are updated periodically to keep pace with inflation. Also, in the event of a joint bankruptcy filing by husband and wife, all exemptions (except the state homestead exemption) are doubled,
These examples demonstrate maximizing exemptions and why the vast majority of Chapter 7 Debtors get to keep most if not all of their property.
The Massachusetts bankruptcy attorneys at Nashawaty & Rand serve clients throughout the Greater Boston Massachusetts region including Abington, Avon, Boston, Braintree, Brockton, Bridgewater, Canton, Dedham, Dover, Easton, Hanover, Hingham, Hollbrook, Marshfield, Medfield, Milton, Norwell, Norwood, Quincy, Randolph, Rockland, Sharon, Stoughton, Walpole, Westwood, Weymouth, Whitman, Massachusetts.
NASHAWATY & RAND, ATTORNEYS AT LAW
Massachusetts Bankruptcy Attorneys
654 Washington Street
Braintree, MA 02184
Phone: 781.848.8545
