Ever wonder how your friend, co-worker, or neighbor filed bankruptcy, but kept their home, car, and boat? Here’s a little secret. It’s because of a nifty part of bankruptcy law called “bankruptcy exemptions.”
What are bankruptcy exemptions?
Bankruptcy exemptions are the part of bankruptcy law which sets out what property you can keep while using bankruptcy to eliminate debt. The idea is to allow you to emerge from bankruptcy without going back into debt to purchase a vehicle, furniture, clothes, etc. Remember, the goal in bankruptcy is to provide you a fresh start!
Exemptions differ depending on where you file your case. Some states follow federal law as to what property you can keep, while other states created their own law. A few states allow a choice between federal or state law, whichever may be more favorable. In Indiana, you are limited to following the exemptions set out in Indiana Code 34-55-10-2 (please note, the current code does not reflect recent increases in the exemption limits).
What are the Indiana bankruptcy exemptions?
Indiana law protects a wide variety of property while going through bankruptcy. Some examples include:
- 100% of equity in a primary residence (your home) if owned as tenants in the entirety and only one spouse is filing;
- $19,300 of equity in a primary residence if owned individually or $38,600 if married and both spouses are filing;
- $10,250 of equity in other real estate (like a rental or vacation home), vehicles, and personal property (furniture, electronics, clothes, jewelry, etc.) or $20,500 if both spouses are filing;
- $400 total in cash, checking and savings accounts, securities, and other intangibles, or $800 if both spouses are filing;
- 100% of qualified retirement and pension accounts (401(k), 403(b), PERF, TIFF, etc.);
- 100% of Health Savings Accounts (HSA);
- 100% of Earned Income Credit from tax refunds; and
- Up to $5,000 per child for 529 education savings accounts.
How do bankruptcy exemptions work?
Think of bankruptcy exemptions as a shield. When listing your property in a bankruptcy case, we value it at fair market prices (what a reasonable person would pay for it under the current circumstances). This is often at garage sale or Craigslist prices. We then apply bankruptcy exemptions against the property values up to each exemption limit. This shields your interest in the property from creditors, and more importantly, the bankruptcy trustee.
Here’s an example. Let’s say you are filing individually and your home is worth $150,000. You owe $140,000, leaving $10,000 in equity to be protected. We apply the Indiana bankruptcy exemption of $19,300; protecting the entire amount of your equity. By doing so, the bankruptcy trustee cannot request that the home be sold. This allows you to emerge from the bankruptcy with your home and equity intact.
Let’s change the numbers. You’re still filing individually and your home is worth $150,000. But now you only owe $100,000; leaving you with $50,000 in equity. But remember, Indiana’s bankruptcy exemption only protects $19,300 of equity. If you filed a chapter 7 bankruptcy, the bankruptcy trustee would request your home be sold as their is $30,700 in exposed equity. Assuming that the home sold for $150,000, you would receive your $19,300 in equity. But the remaining $30,700 would be paid to the trustee and your creditors. Ouch.
Why should I care about bankruptcy exemptions?
In the above example, a chapter 13 bankruptcy would have been the better alternative since the bankruptcy exemption could not completely shield the $50,000 in equity. A chapter 13 would have allowed you to keep the home and retain the $50,000 in equity.
As show above, your attorney must have a solid grasp of how exemptions work. Not knowing the exemptions, or taking the time to properly evaluate your case, could result in the wrong type of bankruptcy being filed. Worse yet, you could lose property that could have been protected, and pay creditors more than you would otherwise have to.
When researching exemptions, keep in mind that bankruptcy exemptions published on the Internet are often outdated or inaccurate. For example, the Indiana Legislature only publishes updates every few years. You are strongly encouraged to consult with an attorney to obtain the must up-to-date information and to properly evaluate your options.
If you are interested in filing bankruptcy or would like to discuss your options in more detail, please feel free to contact me at (317) 830-5993 to schedule a free, no-obligation consultation.
Photo cred: Sharon McCutcheon