Exemptions in Bankruptcy:
When a person files bankruptcy, most of the time they are able to keep all their property. The law saying what you are allowed to keep in bankruptcy is called an exemption. The US Bankruptcy law is a federal statute (Title 11 of the US Code), and that statute sets forth what you can keep when you file bankruptcy. However, the law gives individual states the option to ‘opt out’ of most of the list in the statute, and set their own standards of what a person filing bankruptcy is allowed to keep without having to pay back the value of the property to the court.
A review of the lists from individual states is interesting to show what was important to families years ago when these first laws were passed. In Arizona it includes 1 typewriter, 1 sewing machine; Idaho includes water rights and crops; Iowa includes musical instruments; Kansas includes military uniforms and a liquor license; Louisiana includes poultry, fowl, and one cow kept for family use; Maine includes a fishing boat; Massachusetts includes wearing apparel, beds and bedding for the debtor and family, 2 cows, 12 sheep, 2 swine, and 4 tons of hay, a church pew, again fishing boats, tackle and nets used in their business; a number of states include burial plots, family bibles, and firearms.
One of the first questions is to be sure what state’s law applies to determine what you keep. The bankruptcy law tries to discourage people from moving to a state with generous exemptions just to file bankruptcy. To this end, the federal law says if you have changed the state of residence within 2 years of filing bankruptcy, then the state’s law that applies is the state where the debtor lived for 6 months before the 2 years before filing bankruptcy. This gets even more complicated since a number of states say only residents of the state can use the state exemption laws. If the state whose law applies has this rule, then the debtor can use the exemptions listed in the Federal exemptions, even if neither the state he came from, nor the state he moved to allow use of the Federal exemptions.
The great majority of people in Florida will use the Florida exemptions. Florida is more generous than most as to homesteads. There is no limit in Florida as to the value of a homestead that can be kept when you file bankruptcy. There is a limit on acreage though. A homestead is only allowed up to ½ acre if it is inside city limits, and up to 160 acres if outside the city limits.
Other limits can be placed on the homestead exemption under certain circumstances, which can be a trap for the unwary. If some of the value of the homestead was attributable to property the debtor sold or otherwise disposed of within 10 years of filing bankruptcy with the intent to hinder, delay, or defraud a creditor, and which otherwise could not have been exempted when it was sold or disposed of, then the exemption in the homestead is reduced by such value.
A more common problem is if any portion of value of the home was obtained within 1215 days (3 ½ years) and the equity in the home is more than $170,350, then the excess value is not exempt. An exception to this rule is that if the excess value came from the sale of another home that was exempt as homestead in the state then the value can be exempted by the debtor.
One I have not seen applied in practice, but again could trip up someone unaware of it is that the value of the homestead is limited to $175,350 if the debtor had been convicted of a felony which demonstrates that the filing of the case was an abuse of the provisions of the bankruptcy; or if the debtor owes a debt arising from violation of securities laws, intentionally injuring someone, or willful or reckless misconduct that caused serious physical injury or death to another individual within five years of the filing of the bankruptcy (or some similar actions related to fraud or fiduciary misconduct). Again there is an exception if the excess value is reasonably necessary for the support of the debtor or a dependent.
Florida also has unlimited exemption for cash value of life insurance and annuities, and almost all tax qualified pensions and retirement plans. Generally bank accounts that include only money that is otherwise exempt also are exempt (ie social security funds, wages of the head of a household, certain VA disability benefits).
Florida is less generous than other states as to other exemptions. It only allows $1,000 equity in a motor vehicle, and $1,000 equity in other non-real estate property (increasing to $5,000 if the debtor is not able to claim a homestead exemption or get the benefit of one).
The value used by the courts is generally what the property would be worth if it was sold on Craigs list or of vehicles sold to a dealer (though some trustee’s assert the value of a vehicle would be what a private party would pay if it was advertised on such sites). Any liens on the vehicles or personal property would reduce the effective value for this analysis.
If a debtor has too much property, they may be able to file Chapter 7 and simply buy back the excess value from the trustee with money earned after the filing (with a short time period for such buy back), or with money that is protected when the case is filed. If there is too much to buy back quickly, the debtor can file Chapter 13 and keep all the property, simply paying back creditors over 3-5 years an amount based in part of the value of the nonexempt property. The debtor also has the option to choose to keep some items, and let the trustee take some items, reducing the amount that needs to be bought back in a Chapter 7 case.