For those struggling with debt, worn out by litigation, threatened by foreclosure, or facing other financial issues, bankruptcy may offer a lot of relief. In some cases, bankruptcy is the best option to address many of these issues all at once. Getting rid of debt is the most obvious benefit of filing for bankruptcy. But what happens to a person’s property (assets) when they file for bankruptcy? Do they keep everything free and clear of their debts, do they lose everything and walk away with nothing or something in between? Luckily, there are protections, known as bankruptcy exemptions, under both state and federal which, in many cases, protect most or all of a person’s property.

Understanding Exemptions

Exemptions are legal protections for people that protect their property from creditors. Exemptions vary greatly in type and amount, vary greatly from state to state, and vary if federal bankruptcy exemptions are used instead of state bankruptcy exemptions. It’s crucial to understand how exemptions work to protect people’s property in bankruptcy. When exemptions are coupled with the right kind of bankruptcy case, are properly claimed, and when coupled with a proper liquidation analysis, they can provide a great deal of protection for people’s property.

People can claim exemptions in most kinds of bankruptcy cases, including in Chapter 7, Chapter 13, and Chapter 11. Bankruptcy exemptions can be claimed under state law or federal law. Exemptions are not automatic; they must be actively claimed in a bankruptcy petition. In turn, the bankruptcy petition discloses the exemptions for all creditors and parties in interest to review. Those parties can object to the exemptions claimed in the bankruptcy petition for a number of reasons. This is why it’s crucial for people to claim the right kinds of exemptions for the right kinds of property. 

what are exemptions in bankruptcy

Exemptions for New Jersey Bankruptcy Cases

In New Jersey, most people in bankruptcy claim federal exemptions. This is because, unlike other states, New Jersey has very minimal exemptions to offer its citizens. New Jersey state bankruptcy exemptions include Household goods and clothing up to a total of $1,000, a portion of a person’s wages, and retirement savings and pensions. By today’s living standards, these exemptions are virtually non-existent.  

Compare New Jersey’s exemption scheme with the federal exemptions, which include some of the following examples of exemptions in effect as of April 1, 2019:

Home Equity Protections

The federal homestead exemption protects up to $25,150 inequity in a person’s principal place of residence. This exemption amount is accurate as of April 1, 2019, and periodically adjusts. The person claiming that homestead exemption must own an interest in the residence, and must actually live at the residence. The residence can be an apartment, a single-family home, or other types of homes including a residential trailer. However, the homestead exemption can’t be claimed to protect the equity in non-residential real property used as an investment or for rental income. 

Personal Property Protections

A person’s personal property includes virtually everything they own besides their real property (real estate).  Here are some examples of federal exemptions that people can claim in their personal property: $13,400 in a person’s interest in a life insurance policy; $12,625 in a person’s collective household goods; $2,525 for equity in tools of a person’s trade; $1,700 for equity in a person’s jewelry. If a person does not claim equity in real property, they can use the “wildcard” exemption, which is currently $1,325 plus up to $12,575 of any unused portion of their homestead exemption, on any other property.

chapter 7 exemptions

Bankruptcy Exemptions with Middlebrooks Shapiro

Claiming and protecting exemptions is a crucial part of a person’s bankruptcy filing. If exemptions are not properly claimed, a person’s entire case may be impacted, such as the need to increase the monthly trustee payments required under a Chapter 13 plan of reorganization. Even more impactful is a person’s failure to properly claim exemptions in a Chapter 7 case, which may result in a Chapter 7 trustee selling that person’s property to realize the non-exempt equity and disburse it to creditors. This is why it’s crucial for people to consult with experienced bankruptcy counsel on exemptions in bankruptcy, like the experienced attorneys at Middlebrooks Shapiro. Our team is on standby to help you protect your assets throughout your bankruptcy case. If you are ready to begin your journey to financial freedom, schedule a consultation today.