Many states allow bankruptcy debtors to choose between state and federal exemptions. As a general rule, the federal exemptions are more debtor-friendly than state laws.
Most debtors may exempt an unlimited number of motor vehicles as long as the aggregate value is less than $5,000; married joint debtors can exempt up to $10,000. This amount, and all other exemption amounts, are subject to the wildcard homestead exemption, which is discussed below. This exemption, although it seems rather small, is usually more than enough to exempt one or two vehicles. Most people either own relatively new vehicles that have almost no equity or older model vehicles that have almost no value.
There is a two-step process of determining vehicle equity. First, determine the vehicle’s as-is cash value. The Kelly Bluebook website is an excellent starting point, but it does not necessarily tell the whole story. Used car value has much to do with condition, so there is some guesswork here. Furthermore, the result is the fair market value, which is not the same thing as the as-is cash value, or the “garage sale value.” Before they can be sold for maximum value, most vehicles need work, if nothing more than cosmetic touches like re-upholstered seats. If this work is not done, the value is substantially less. Exactly how much less is largely a question for an attorney to answer.
The second step is much more objective because to determine the amount of equity, one only need subtract the outstanding loan value.
How does this work in practice? Assume Daniel Debtor has a 2012 Toyota with a bluebook value of $10,000, and he still owes $3,000 on the note. Even though it appears he has $7,000 in equity, Daniel may still get to keep his car, because the as-is cash value is substantially lower than the bluebook value.
Another factor weighs in Daniel’s favor — the trustee (person who oversees the bankruptcy on behalf of the judge) is not a used car salesperson. Even if the as-is cash value is close to $10,000, by the time the trustee performs necessary repairs, stores the car, and pays off the loan, there will probably be little or nothing to distribute to Daniel’s creditors. So, it is not in the creditors’ best interest for the trustee to seize the Toyota and the trustee is prohibited by law from taking such action.
The U.S. Supreme Court recently reaffirmed that earned IRAs, 401(k)s, and other retirement accounts are 100 percent exempt. The theory is that these accounts often represent decades of fiscal responsibility and sacrificial saving, and all those months of careful planning should not be lost simply because the debtor experiences a short-term financial emergency which, in most cases, was almost completely beyond the debtor’s control.
Other similar accounts, like unemployment benefits and workers’ compensation benefits, are also exempt. The same goes for most public assistance benefits, veterans’ benefits, and Social Security Income/Social Security Disability payments.
This exemption is a big deal because most states do not allow debtors to exempt their paychecks.
This exemption is designed to address the so-called “floating check controversy” that often arises in consumer bankruptcies. Assume our friend Daniel makes a mortgage payment early Monday morning and files bankruptcy a few hours later. When he files, the bank has not yet pulled the payment out of his account, so although the funds are still in his possession, the money is not his to spend.
In many states, the trustee may file a motion for turnover to claim the disputed funds and distribute them to creditors, but in some states, the money is probably exempt, so there is no basis for a challenge.
Individual debtors can exempt up to $21,500 in equity; married joint debtors can exempt up to $43,000. Additionally, $5,000 of this exemption, if it is not used on a homestead, can be applied as a wildcard exemption.
Many of the same principles that apply to motor vehicles apply to houses. For example, a house’s as-is cash value is about 60 percent of the fair market value, because that is typically what a home investor will pay in an as-is cash sale. An experienced attorney can value the asset on Schedule A in a way that is consistent with the Bankruptcy Code and will not trigger unwanted inquiries from the trustee.
Wildcard and Other Exemptions
This exemption applies to otherwise non-exempt assets, like vacation timeshares, additional motor vehicles that cannot be exempted under 44-13-100(a)(3) and owned rental property. It is important to accurately value the homestead to maximize the $5,000 transfer exemption. The transfer exemption is augmented by a $1,200 statutory exemption found in 44-13-100(a)(6).
Most personal property, including up to $10,000 in personal injury settlements, $5,000 in furniture and other personal possessions, are likewise exempt. Under the as-is rule, most household furniture, even if it is practically new, is essentially valueless.
If you have questions regarding exemptions in your bankruptcy, please call us today to discuss your personal situation with an experienced Ohio bankruptcy professional.