In Chapter 7, Can I Keep My Stuff?

         Bankruptcy is a way to legally get rid of, or "discharge," certain debts. The most common debts that are discharged in Chapter 7 are medical and credit card bills. Since the recent mortgage crisis, many people are also discharging any remaining debts they owe due to the foreclosure of their real property. Some tax debts can be discharged, but discharging tax debt is tricky.

         Chapter 7 is for people who qualify based on income (they have to pass a means test to qualify), don't have too much valuable property, and, if they have real property, are current on their payments. Chapter 7 almost always takes much less time than Chapter 13, and there are no monthly payments like there would be in a Chapter 13. Chapter 7 is called a "liquidation" bankruptcy because the trustee, a third party who represents creditors' interests, will sell any asset that is not protected, or "exempted," from sale. It sounds scary, but with a good attorney it is a pretty simple process to make sure little or none of your property will be sold if you file Chapter 7. You will get a pretty good idea what might be sold before the case is filed, so you can make the decision whether to go forward and file the case, or find another solution for your debt problems.

          California has two sets of exemptions. The first set includes something called a "homestead" - more about that later. The second set gives debtors a limited allowance which they can use to protect anything: cash, gold, jewelry, art or virtually anything else. This is called a "wildcard" exemption. While the wildcard exemption can be used to protect almost anything, there are still some tricky rules which your lawyer will discuss with you. Whether you choose the first list of exemptions - which we call the homestead list, or the second list of exemptions - which we call the wildcard list, is a decision you must make in discussions with the attorney.

          When lawyers in the Law Offices of David A. Tilem meet with a potential client, we first try to get a list of your property and try to figure out its value. "Property" in legal-speak is not limited to land or buildings, it also includes cars, clothing, cash, jewelry, company stock, savings bonds, patents and a lot more. Lawyers use "property" to refer to anything you might own or have.

          For most people, the most valuable property they own is their home. Under the homestead list, debtors are allowed to keep or "exempt" some equity in their home. (Equity is the difference between the value of the property and the amount of all mortgages and liens on the property.) The amount debtors can keep depends on factors like age, disability status, marital status, and income level and others. Generally speaking, people over 65 can keep up to $175,000 in equity. Married people or people living with dependent family members can keep $100,000 in equity. Single people can keep only $75,000 in equity. This is not a complete statement of the law, but it does give you some idea.

          Many people also have retirement accounts such as 401(k)s and IRAs. The money in these accounts is also protected. In some cases there is a $1 million per person limit, but most people filing bankruptcy never approach that limit.

          For those who do not have a home, it is usually (but not always) better to use the wildcard exemptions. Currently, you are allowed to keep property, any kind of property, which has a value of not more than $25,340.

          Both the homestead list and the wildcard list have specific exceptions. Sometimes the amounts differ between the two lists. Specifically protected items include "normal" clothing, household furniture and furnishings, appliances, jewelry of a limited value, some equity in a car and other things. The exemptions can be "stacked". So if you have jewelry which is worth more than the limited value, you can use the jewelry exemption and then "stack" part of the wildcard exemption on top of it so that, together, you can keep the entire item.

         Deciding how to use the exemptions can be simple or complicated, depending on the facts of your particular situation. We recommend that you consult with on of our attorneys because the rules can be tricky.

         If it turns out that you have a lot more than you can protect in Chapter 7, you may want to consider using the Chapter 13 repayment program or even the Chapter 11 reorganization process instead of Chapter 7. Again, you should discuss this with your attorney.

          Once you have figured out what you can keep and what you might lose in Chapter 7, you need to make sure that you are qualified to file Chapter 7. Can you pass the Means Test? Watch for my next column to find out.