Perhaps the most common question I get when I am talking to a client for the first time about filing bankruptcy is Don’t I have to give up everything? The answer is no, and that’s because of your exemptions.
It is often said that bankruptcy is about giving the debtor a fresh start, not a head start. In order to accomplish that goal, Congress knew that it could not leave the bankruptcy debtor with nothing. So how much does the debtor get to keep? The answer is at least what the debtor is allowed to exempt.
Exemptions used by debtors are either federal or state, depending on which state you file in and how long you have resided in that state. Your state has either chosen to use the federal exemptions or decided to opt out and provide state specific objections. If you have not lived in your current state for at least two years prior to filing then you will either use federal exemptions or maybe the exemptions from the state you lived in for the majority of time over the 24 to 30 months prior to filing. If you have moved states in the two years previous to filing and want to know what exemptions you will use, see here.
Exemption amounts vary wildly from state to state, as well as from state to federal. Debtors get to exempt amounts for specific items (example: In Georgia, a debtor can exempt $3,500 in equity in a vehicle); however, not all assets have a specific exemption amount, in which case the debtor will have to use the debtors allowed wild card, to exempt the item. For example, Georgia does not have a specific exemption for cash, so a debtor must use his/her wild card to exempt whatever cash the debtor is in possession of at the time of filing.
For a full list of Georgia exemptions and amounts, see OCGA 44-13-100. For a full list of federal exemptions and amounts see 11 USC 522.
It is important to note that what you are exempting is not the value of your assets, but the value of your equity in the item. So if you own a car worth $10,000, but you owe $12,000 on the car, then you have no equity and therefore do not need to exempt it. You might want to give up your car for other reasons in the bankruptcy, but you will not have to give it up to your trustee to liquidate since it has negative equity. However, if your $10,000 car was owned free and clear, then you would need to have $10,000 of exemptions to use on it, or else possibly have to pay the cash equivalent of the non-exempt amount to retain or see the trustee liquidate it.
Note: If the trustee does liquidate the car, you do get paid your exemption amount by the trustee, while creditors get the excess. Also note: Debtors often file a chapter 13 to prevent liquidation of an asset. If they are over exempt in an asset, then they can keep the item, but must pay off the over exempt amount to creditors over the life of the chapter 13 plan.
Since most bankruptcy filers owe more on their big-ticket items than they are worth (think your underwater house and/or car), and dont have a huge amount of assets otherwise, they often keep all their items when they file chapter 7.