If you’re considering filing for bankruptcy, you may hear the term “estate” and wonder what that’s about. In this instance, it doesn’t refer to a large home or mansion or to the belongings of someone who has passed away like an “estate sale”. In a bankruptcy case, the “bankruptcy estate” simply refers to everything the debtor owns at the time of filing. This could include a home, a vehicle and personal assets like clothing or jewelry. As part of the bankruptcy process, the assets in the bankruptcy estate are used to pay off creditors.
An important purpose of bankruptcy is to give debtors a fresh start financially, and that’s where “exemptions” come in. Exemptions allow the debtor to retain critical things needed for daily life by excluding them from the bankruptcy estate. This is very important, because any assets that are not exempted will go to the estate to be distributed to creditors. An experienced bankruptcy attorney will help ensure that as many assets as possible are exempted from the estate. Also, assets can only be exempted if the court is aware of them, so it’s very important that all assets are listed in the bankruptcy petition. Again, an experienced attorney will help ensure this paperwork is completed and submitted properly.
Exemptions Vary From State To State
When bankruptcy proceedings are concluded, any assets from the estate are sold and then distributed among creditors. However, individuals are allowed to retain a reasonable amount of property in order to maintain employment and a place to live. This “exempt” property varies by state, but in Maryland individuals can generally exempt: $5,000 in personal property (such as clothing), up to $25,150 of equity in an owner-occupied home or condo, insurance, tax-exempt retirement account savings and up to $11,000 in wildcard exemptions (which could include a vehicle). It is critical to fill out the bankruptcy filing correctly and not make any errors or mistakes when requesting exemptions. This is one reason why it is highly advisable to work with an experienced bankruptcy attorney.
The Homestead Exemption
When considering all of the items needed for daily life, there’s probably no asset more important than a home. The key to successfully protecting a home during a bankruptcy is to get the home’s equity exempted from the proceedings. Assuming mortgage payments are up to date, the debtor’s equity is calculated by subtracting the outstanding mortgage balance from the home’s current value. The result of this calculation represents the equity, or the money the debtor would be allowed to keep after the theoretical sale of the home. Exemption laws vary from state to state, but most states allow some exemptions in home equity. In Maryland the homestead exemption for owner-occupied dwellings is $25,150. If the qualifying exemptions exceed the debtor’s home equity, then their home will not be sold in the bankruptcy proceedings. However, if the exemptions do not cover the amount owed, then the house will be sold, the mortgage paid off in full, and remaining balance will be given to the debtor.
Every state has different laws that dictate property exemptions during Chapter 7 or Chapter 13 bankruptcies. But in any state, bankruptcy cases are complex and are made even more so when a mortgage is involved. At Sirody and Associates, our goal is to help bankruptcy filers get back on their feet financially and make a fresh start. We’ve been helping Marylanders get out of debt for over 20 years. If you are struggling financially and considering filing for bankruptcy, contact us online or call (410) 415-0445. We will make sure you understand all available options.