Debt by AnnaMaria Andriotis (Author Archive)
Filing for Bankruptcy: What Can You Protect?
By the end of the year, more than 1.6 million people are expected to have filed for personal bankruptcy, according to the American Bankruptcy Institute. Almost 65% of filers chose “income reduction” as a reason for filing, while 42% listed “job loss” as a reason (debtors can choose more than one).
Filers who have been conscientious borrowers and consumers will often have equity in their homes, possess cars that are partly or fully paid for, and hold savings accounts designed to provide for them in the future. But there’s no credit for being responsible when it comes to bankruptcy court — and the more responsible a consumer has been, the more they have for a trustee to take and sell off to pay creditors. “Bankruptcy doesn’t care that they’ve been good Samaritans,” says Steve Elias, bankruptcy attorney in Lakeport, Calif., and co-author of “How to File for Chapter 7 Bankruptcy.”
CHAPTER 13 or CHAPTER 7? Regardless of filing status, a FICO credit score will take the same hit — a reduction of up to 240 points for a borrower with a score of 780 and a reduction of up to 150 points for a 680 scorer. But there are other differences: Chapter 13: Who it’s for: People who are trying to hold on to their assets and who also make enough money to cover daily expenses — with a little left over to pay creditors a reduced amount. How it works: A payment plan is set up through the court, but usually for less than the amount owed. Payments are made over a three-to-five year period, and must equal at least the amount of money creditors would have received if you filed Chapter 7. Chapter 7: Who it’s for: People who have no assets, like a home or car, to lose — or who have just enough to cover daily expenses (or less) but no extra for a payment plan. How it works: Non-exempt assets are sold, proceeds are given to creditors and most debts are forgiven. |
Here are the five assets that might be protected in bankruptcy.
A home
Holding on to your home depends on the state you live in and the equity in your house. Florida residents can keep up to 160 acres outside of city limits and the home that’s on it, or up to half an acre and a home in cities. Texans can protect up to 200 acres of rural property or up to 10 acres in the city. And in general, if a home is worth less than the mortgage balance – that is, the owner has no equity – the owner can keep it as long as the payments stay current.For filers who do have equity, most states offer an exemption — money from the trustee’s sale of the home that stays with the homeowner. But over that amount, every penny of a sale is applied to outstanding debts and paying the trustee. In California, for example, the equity exemption is up to $175,000, but other states are far less generous: In Ohio, the state exemption for a home is up to around $45,600 if married or up to half that for singles. In Tennessee, the exemption is as much as $12,500 for singles and up to twice as much for couples.
Tax-exempt retirement funds
Most tax-exempt retirement funds, like 401(k)s and individual retirement accounts, are out of reach from creditors. IRAs are protected up to about $1.17 million per person.But trustees view these accounts skeptically and will flag suspicious actions like dumping cash and investments – which are usually not protected in full in bankruptcy – into retirement plans, says Howard Ehrenberg, a bankruptcy attorney and member of the Chapter 7 Panel of Trustees for Central District of California. Filers who get caught trying to protect assets in that way risk losing some of that amount, says Richard Nemeth, a bankruptcy attorney in Cleveland and state chair of the National Association of Consumer Bankruptcy Attorneys.
Filing for Bankruptcy: What Can You Protect?
(Page 2 of 2)Car
Holding on to a car depends on several factors, including what’s covered by state exemption. In general, as with a house, owners who owe more than the value of the car can generally keep it, as long as payments stay current. Free-and-clear car owners can keep a car if it’s worth less than the state exemption, but drivers who have a car loan and some equity in their car can see their vehicle seized and sold, and recoup only their equity up to the exemption. Delaware and Nevada grant the most generous exemptions for cars, each up to around $15,000. In the 16 states that follow the federal exemptions, including Connecticut, New Jersey and Pennsylvania, the federal car exemption is up to about $3,450, but bankruptcy filers can also to dip into the federal “wild card” of up to roughly $12,000 to keep the vehicle. Married couples who jointly own the car can claim a federal exemption of up to $30,900. One of the strictest states is Florida, where the exemption is capped at $1,000 and there’s a wild card option of up to $2,000 per person, assuming the couple hasn’t claimed a homestead exemption.Life insurance policy
Term insurance policies are safe after bankruptcy, but whole-life insurance policy holders aren’t always so lucky: These policies are considered an investment vehicle.Depending on the state, there could be exemptions – Florida protects the entire policy, other states only protect a fraction. And in Ohio, life insurance policies remain intact when the beneficiary is a dependent; otherwise, there’s no exemption, and the state's wild card is around $1,075 per person.
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