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Tuesday, June 12, 2012

What Property Can I Keep if I file Chapter 7 Bankruptcy in Connecticut?

      When I meet with prospective Chapter 7 clients a common concern they have is what property can they keep if they file bankruptcy. I will attempt to provide a general explanation with this post and will not provide detailed bankruptcy code and state statutory references to avoid over complicating this topic. In order to properly review how these exemptions apply to your situation you should always consult with an experienced bankruptcy attorney. When you file bankruptcy all of your property becomes property of the bankruptcy estate and you are allowed to keep the property you can exempt out from this estate based on the federal or state exemptions. Under the bankruptcy code you must choose one or the other and are not allowed to mix and match the federal and state exemptions to best suit your situation. This discussion only applies to the bankruptcies filed in the state of Connecticut since each state has their own state exemptions.  If you are a homeowner who wants to file Chapter 7 to get rid of your credit card debt, but keep your home, which at all times in this post means your principal residence, your number one concern is which homestead exemptions should you apply to the equity in your home. First, if your mortgage debt exceeds the value of your home than you have no equity and there is nothing to exempt and assuming you are current with your mortgage payments you can keep your home. Second, if you do have equity than the exemptions you choose depends how much equity you have in your home. For example, for a married couple with a house worth $250,000 and mortgage debt of $150,000 they would need to use the Connecticut state exemptions which provide $75,000 per homeowner to exempt the $100,000 in equity they have. The current federal exemptions only allow $21,625 per homeowner which would not work in this situation since any property of value which is not properly exempted at the time of the bankruptcy filing will be sold by the Chapter 7 trustee and after payment of his fees and expenses and any secured debt the remaining proceeds will go to unsecured creditors. In most of my current cases due to the economic downturn and mortgage crisis most of the homeowners have little or no equity in their home and therefore they file with the federal exemptions for the reasons discussed below.
     
The next most common exemption concern is what exemptions are available for motor vehicles especially newer cars which were purchased without auto financing. The current federal and state exemption amounts for motor vehicles are almost identical with $3,500 for the state and $3,450 for the federal. The federal exemptions usually offer the best option in cases where the debtors do not own any real estate or their have no or little equity in their home. The federal exemptions currently provide up to $11,975.00 for a "wild card exemption" which includes $10,825.00 of any unused portion of the federal homestead exemption as opposed to only a $1,000.00 state wild card exemption. For example, if an individual owns a car worth $10,000 he can first use the $3,450 federal car exemption and than the "wild card" exemption for the balance of $6,550.00 to keep his car. The wild card exemption can be applied to any property even $11,000.00 in a savings account. There are other variations between the federal and state exemptions, but the advantage of the federal wild card exemption usually dictates that most cases be filed using the federal exemptions unless you need the $75,000.00 state exemption discussed above. I have only tapped the surface with this post of the proper application of bankruptcy exemptions and there are many other specific exemptions which exempt in whole or in part 401Ks, IRAs, life insurance policies, tools of trade among many other types of personal property. Suffice it to say that in order to protect your property in conjunction with filing a Chapter 7 bankruptcy it is extremely important that you review all of your assets with an experienced bankruptcy attorney. You do not want to be in a situation that I have unfortunately witnessed at creditors meeting where an asset is disclosed for the first time and cannot be properly exempted and taken by the trustee. An experienced bankruptcy attorney will use the appropriate exemptions for your filing or in some cases tell you that you cannot exempt all of your assets so you can make an informed choice whether filing Chapter 7 bankruptcy is your best option.


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