Chapter 7 bankruptcy has many advantages, including the ability to discharge debt such as medical bills, credit card debt, personal loans, and even walking away from a car or a home that’s become too expensive. However, in Chapter 7, a Chapter 7 trustee is appointed to scrutinize the bankruptcy paperwork and determine if the bankruptcy filer has any assets to take, liquidate, and distribute proceeds to creditors. Chapter 7 bankruptcy exemptions allow a bankruptcy filer to protect various different kinds of property from the reach of a Chapter 7 trustee and creditors.
A debtor must list all of their property in bankruptcy.
In every chapter of bankruptcy, the bankruptcy filer, or the debtor, has an obligation to list all property that they own of any kind. In fact, the Bankruptcy Estate includes “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541. Intentionally leaving property off of a bankruptcy is a serious crime punishable by prison and significant fines, so it is important to make sure all property is listed. Property includes real property, such as a home, all vehicles such as cars and RVs, and any other kind of vehicle, boats, aircraft, household goods and furnishings, checking accounts, clothing, retirement accounts, and even tax refunds, among other things. All of the bankruptcy paperwork must be signed by the debtor under the penalties of perjury, and each debtor is asked questions by a Chapter 7 trustee about their bankruptcy during a 341 meeting of creditors, which is also under oath and recorded. However, Chapter 7 bankruptcy exemptions allow a debtor to protect different kinds of property.
What is the value of property with a secured debt?
Bankruptcy categorizes debt into various different types. Secured debt is debt that is backed up by collateral. For example, many people finance the purchase of a car. If the car payments aren’t made, the lender has the ability to repossess the car. The lender can also personally sue the car owner for the balance owed on the debt. The ability of the car lender to repossess the car is because the lender has a lien on the car, and the lender’s name and address is written on the car title demonstrating the lien. This is known as a secured debt.
The same goes for a mortgage on a house. When someone buys a home and finances the home through a lender, they sign many documents at closing. Two of the documents that are signed in Maryland are a Note and a Deed of Trust. The Note means that the borrower is personally responsible for the debt, so that if the mortgage isn’t paid, the lender can sue the borrower in court and collect on the debt through various means, including wage garnishment and bank account garnishment. The second document is a Deed of Trust, which is a document that gives the lender a security interest or lien on the home, so that if the mortgage payments aren’t made, the lender has the ability to foreclose on the home.
Contrast these debts with unsecured debt, such as a regular credit card. Many credit cards do not require assets to secure the loan, so the credit card company’s only recourse on non-payment of the credit card is to sue the borrower.
One of the questions that Steiner Law Group is asked most often by our clients is can I keep my car and my house if I file Chapter 7 bankruptcy? In many cases, the answer is yes, but it depends on the amount of equity in the home. If the home is worth $300,000 and the mortgage balance is $310,000, this home has negative equity because the amount owed on the home is more than what the home is worth. This home has no value to a Chapter 7 trustee. If the home does have equity, a Chapter 7 bankruptcy exemption many times is able to protect the equity in the home.
How to protect property through Chapter 7 bankruptcy exemptions.
In most cases, a Chapter 7 debtor who files bankruptcy in Maryland can use Maryland exemptions to protect different kinds of property. These Chapter 7 bankruptcy bankruptcy exemptions, as well as other strategies to protect property, often lead to a “no-asset case,” in which a Chapter 7 trustee, after having reviewed the bankruptcy paperwork and conducted a 341 meeting of creditors, determines that there are no funds in the bankruptcy estate available to distribute to creditors
Maryland has various exemptions, including an exemption that can be used on owner-occupied residential real property for $25,150, a “wildcard” exemption for $6,000 that can be used on any kind of property, a personal property exemption for $5,000 that can be used on property that is not real property, as well as many other exemptions to protect life insurance, retirement accounts, household goods and furnishings, clothing, and various different types of assets.
In the next article, we will discuss in more detail the Chapter 7 bankruptcy exemptions available in Maryland. If you have questions about bankruptcy, please call Steiner Law Group at (410) 670-7060.