Bankruptcy Exemptions

Bankruptcy Exemptions

The bankruptcy code designates certain property as exempt from being turned over and liquidated. If the property is exempt, you get to keep it.  Exempting assets is one of the most important considerations before filing for bankruptcy.

Massachusetts residents may claim either a federal or state scheme of exemptions, but not both.  The Massachusetts scheme allows you to exempt up to $500,000 of your residence, and, usually, all your IRA’s, 401(k)’s and qualified retirement assets, but is more limited when it comes to household goods, tools, furniture, jewelry, etc. The federal scheme, on the other hand, is more generous in exempting most household goods, furniture, clothing, and jewelry, but is not as generous as to homestead. We will help you chose the best exemption scheme to protect most or all of your property.

Here is a general comparison of the two systems of exemptions:

MassachusettsFederal
Homestead (equity in primary residence)$125,000 automatic; up to 500,000$23,675
Motor Vehicle$7,500 ($ 15,000 if elderly or disabled)3,775
Household furniture, appliances, etc.15,000 12,625
Jewelry1,2251,600
Wildcard I – any single item 1,0001,250
Unused Homestead to apply to other property5,00011,850
Tools of Trade5,0002,375
Cash or savings in bank:2,500 + 2,500None listed (may apply unused homestead or wildcard
Life Ins., cash value, loan value100% exempt in certain cirumstances12,625
IRA, 401(k)'s 100% (but no more than 7% of earnings in any one year)1,283,025
Personal Injury RecoveriesNot specifically exempt, may use wild card, etc.23,675
Materials and stock in trade:5,000
Boats and fishing equipment1,500

 Couples filing a joint petition may generally double their exemptions, although they must use the same scheme (state or federal) and may not mix and match between the two schemes.

For assets with secured debts, such as a house or car, a debtor need only exempt the equity in the asset, not the entire fair market value of the asset.

When valuing an asset, the debtor and attorney should use a “liquidation” value, which is less than the fair market value.

If a debtor is not able to exempt an asset, it may have to be surrendered to the Bankruptcy Trustee, but sometimes there are other options.  For example, the property may be “purchased” back from the trustee; and sometimes secured property may be “redeemed” by paying the fair market value to the secured creditor (which may often be much less than the loan balance). Because of the complexity of this issue, it is important to consult an experienced bankruptcy attorney.

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