When filing a bankruptcy case, your assets or property will be classified as Exempt or Non-Exempt. In a Chapter 7 Bankruptcy case your non-exempt assets will sold or liquidated, and the proceeds distributed to your unsecured creditors. In a Chapter 13 Bankruptcy case, you will repay the value of your non-exempt assets to your unsecured creditors during your case. However, in both Chapter 7 and Chapter 13 Bankruptcy cases, you keep your exempt assets. So that begs the question; what is the difference between exempt and non-exempt assets?
When we talk about exempt and non-exempt assets, we are really talking about exemptions. Exemptions are statutory provisions that protect certain types of property up to a specific dollar amount or a percentage depending on the exemption. For example, in Arizona wages are exempt 75% and 25% are non-exempt. A wage garnishment attaches to the 25% non-exempt portion of your wages. Arizona also has a homestead exemption which protects up to $150,000 of equity in your residence. The wage exemption is a percentage while the homestead exemption is a fixed dollar amount.
In the context of a bankruptcy, you keep your exempt assets. Exempt assets are protected from creditors and excluded from the bankruptcy estate. Exempt assets do not have to be liquidated in a Chapter 7 and you do not have to repay the value of them in a Chapter 13. Some common types of exempt assets include:
Pension and retirement accounts such as a 401k, IRA, or other ERISA qualified accounts
Home equity up to $150,000
$6,000 of equity in a motor vehicle; $12,000 if you have a valid handicap placard
Welfare benefits such as unemployment and worker’s compensation
Social Security benefits
75% of earned but unpaid wages
Home appliances, furniture, and other household goods
Wedding and engagement rings depending on value
Tools and equipment that are essential for your job
Firearms depending on value
There are numerous state and federal exemptions, so it is important to consult with a bankruptcy attorney to determine what exemptions apply in your situation.
Non-exempt assets are not protected from your creditors and are an asset of your bankruptcy estate. Non-exempt assets are liquidated, and the proceeds used to repay your creditors. Some common non-exempt assets in Arizona include:
Unpaid tax refunds
Valuable collectables such as stamps, coins, or precious metals
Stocks, bonds, and other investment accounts that are not part of a qualified retirement account
If there is no statutory exemption that applies to an asset, then it is considered non-exempt, and subject to liquidation in a bankruptcy.
Sale and Transfer of Non-Exempt Assets Prior to Filing a Bankruptcy
Are you allowed to sell non-exempt assets prior to filing a bankruptcy case? It depends. You must be able to prove you received fair market value and that the sale was an “arm’s length” transaction. Be aware, you cannot simply transfer or give away property to a friend, family member or other party to keep it out of your bankruptcy and out of the reach of creditors. Such transfers are referred to as a fraudulent conveyance and can be recovered by a bankruptcy trustee or your creditors. Even worse, such a transfer can result in the loss of your bankruptcy discharge and subject you to criminal penalties and fines. Property transfers and sales must be disclosed on your bankruptcy petition. You should speak with an experienced bankruptcy attorney before selling or transferring any asset.
If you would like assistance in determining your exemption options, contact Treguboff Law, PLC today for a free consultation.