What Are Exemptions to Bankruptcy?
Interviewer: I’m sure one of the beliefs in bankruptcy the court will take everything you own, but they don’t, is that right? Aren’t there exemptions to bankruptcy?
Bankruptcy Exemptions Allow You to Retain Your Possessions
Tanya: Exactly, there is a lot of property that’s exempt so you can pass through the bankruptcy really being able to retain most of your belongings.
Interviewer: What are some of the assets you can keep and what are the levels approximately?
There Are Two Levels of Bankruptcy Exemptions, a State and a Federal
Tanya: There’s an amount of equity that you’re allowed to keep in your house in New Jersey. First of all, there are two different kinds of exemptions; there’s state and there’s federal and you can choose.
The State Exemption Statutes Differ from State-to-State with Some Being More Lenient than Others
Bankruptcy law is federal; however, each state legislature has dictated different exemptions. You do hear about being able to go to Florida or Texas and you can own a big giant house free and clear and they can’t take it from you in bankruptcy. There are states where people can go and invest in different assets and protect those items from the bankruptcy filing and the bankruptcy court.
New Jersey Allows for a $22,975 Exemption in Real Estate per Individual
This amount periodically changes. New York is different than New Jersey also. Each state has its own statutes and then there are the federal exemptions. In New Jersey, we typically use the federal exemptions. For example, with real estate in New Jersey, each person right now is entitled to $22,975 of equity in their house.
These Exemptions Enable Many People to Retain Ownership of Their Homes
If a couple owns a house, the exemption is double. It is approximately $46,000 of equity.
If your house is worth $300,000 and your mortgage is $250,000, you can certainly stay in that house if you continue to pay the mortgage.
Apart from that, you could have $50,000 of credit card debt and you file for bankruptcy. That would discharge the credit card debt completely. You could stay in that house and have the $46,000 or $50,000 of equity. Between the mortgage and the exemption, there’s no money left to take to pay creditors.
Are Other Assets Protected by Exemptions?
Interviewer: What about cars?
Tanya: Household goods and furnishings, such as clothing and appliances, have liquidation values. It’s not replacement value.
The exemption for that is $12,250.
With the equity in a car, again, it doesn’t have to be free and clear, it’s just the difference between the value and what you owe on it is $3,675. There is an exemption for tools and implements of trade, which is $2,300.
A Wild Card Exemption Can Protect a Bank Account up to a Certain Amount
Obviously a lot of people don’t own a home, so there is under the law what’s a called a wild card exemption. With a wild card exemption you can actually have this amount in the bank and they can’t touch it. The amount you can keep is $12,725.
Interviewer: That’s a fairly good amount to be able to retain.
Tanya: Right, it’s not insubstantial. For example, if you have a car that’s really worth $12,000 and you don’t own a home and you’re not using anything else, you could use that wild card exemption on top of the car so you can keep your car. It’s not a problem.
Interviewer: Yes, that makes sense.
Tanya: Again, these are liquidation values. These are practical values. These aren’t what’s this going to cost me to replace.