What Do You Have To Lose? Understanding Bankruptcy Exemptions

5 August 2017
 Categories: Law, Blog


Bankruptcy is undoubtedly a major life decision; after all, your ability to get credit could be affected for a number of years. What's worse, you may be confused about the possibility of actually losing your home and car. Just thinking about it can be terrifying. While you're working with a bankruptcy attorney, it may help to gain a better understanding of how bankruptcy exemptions work. Exemptions are just a way of reducing the value of something to help keep it off the chopping block. Don't be scared; just read on to learn more.

Home Sweet Home

This single aspect of filing a chapter 7 bankruptcy causes many people to avoid bankruptcy or to put it off for far too long. You should realize that just the act of filing bankruptcy does not automatically mean that you will lose your home. The possibility of losing your home to bankruptcy depends on several different factors, such as those below:

  1. Your state's homestead exemption. The amount allowed varies, and it's usually several thousands of dollars. This is the amount you can use to reduce the value of your property. For example, if your home is worth $100,000 and your state gives you a $20,000 exemption, your home is now effectively valued for bankruptcy purposes at $80,000. When it comes to bankruptcy and your property, you want less value, not more.
  2. How much equity is available in your home. This is your home's appraised value deducted from your mortgage balance. Bankruptcy trustees are not interested in paying off large mortgages just to take ownership of your home to pay your creditors, which leads to the next factor.
  3. Your bankruptcy amount. The amount you actually owe your creditors is also considered since it would be very unlikely for a bankruptcy trustee to take your home worth $100,000 to pay off your $50,000 in debt.

Given the above information, it's very important to note that if you are behind on your mortgage and cannot get caught up, your lender may foreclose on your home after your bankruptcy has become final.

Don't Lose Your Ride

The way things work with vehicles is very similar to the way they work with your home. If you owe a lot of money in relation to the value of your vehicle, the vehicle presents no value to the bankruptcy court. Some states offer vehicle exemptions and some lump that exemption in with the general personal property category that you are allowed to keep. Additionally, you may be presented with the option to reaffirm the car loan debt. This is where you promise to continue to make payments on the vehicle in exchange for being able to keep it. The debt will still be owed after your bankruptcy is complete, until the original loan is satisfied.