How Do Bankruptcy Exemptions Work

How Bankruptcy Exemptions Work

When a debtor files Chapter 7 bankruptcy they are allowed a certain amount of exemptions in their case. An exemption is the dollar amount of equity or value a debtor is allowed to protect from creditors and the bankruptcy trustee.

Below are a few examples of how bankruptcy exemptions work:

1. A debtor who has a vehicle worth $50,000 may have an exemption available to them for $40,000.In this case, the bankruptcy exemption does not cover the entire value of the vehicle; but if the property is sold by the bankruptcy estate, the debtor would keep the $40,000 cash exemption while the balance would go to the bankruptcy trustee and eventually the creditors in the case.

2. Using the same example above, if the $50,000 car had a $60,000 loan on it; the debtor would not need to use the bankruptcy exemption because the debt owed on the car is more than its actual value. In this case the debtor could either, keep the car and continue to pay the loan, or return the vehicle to the creditor and have the $10,000 debt balance discharged in bankruptcy.

3. The homestead bankruptcy exemption is one of the most important tools available to the bankruptcy debtor; but it is also one of the most challenged. A debtor taking the homestead exemption must prove that they are in fact using the residence receiving the exemption as their primary residence. If they can do so, in Texas they can protect all of their home’s equity from creditors.

Have Any More Questions About Bankruptcy Exemptions?

If you have any specific questions regarding bankruptcy exemptions or the bankruptcy process, we are here to help. Simply call us or fill out out contact form to submit questions or set up a free consultation.


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