What are exemptions anyway?
One word that often appears in bankruptcy is “exemption.” An exemption is what it sounds like, but it is often misunderstood. In this post, I am going to discuss what an exemption is, why exemptions matter, and how exemptions protect property (like cars and houses) in bankruptcy. Read the law itself at https://www.law.cornell.edu/uscode/text/11/522
The first concept to understand is the bankruptcy estate. When you file for bankruptcy an estate is created and a trustee is appointed to administer estate assets. A bankruptcy estate consists of everything you own at the time the case is filed, as well as some things you’ve owned and disposed of. For instance, if you gave your brother a $10k car nine months before filing your case, that car is part of the bankruptcy estate just like your current car.
Ordinarily, a trustee's job is to liquidate all your assets and use that money to pay creditors. Now, without exemptions, you would lose everything you own. Period. But the law allows you to keep a certain amount of your property. This is where exemption rules become relevant and useful.
Exemptions let you take the things you own and keep them up to a certain point. One example of this is the homestead exemption, which in Washington State allows you to keep a minimum of $125,000 provided you qualify for Washington State exemptions. What this means is that if you have $100,000 of equity in your home, the Washington State homestead exemption protects you from losing your home because your home equity is entirely exempt and cannot be used to pay creditors. But if you have $500,000 of equity, and you've owned the home for, let's say, one year the Washington State exemption means that you lose your house and the trustee writes you a check for $125,000. That's how exemptions work. Washington also allows each debtor to exempt $15,000 of a single vehicle. There are other things you can exempt as well. And the state wild card exemption, which is $10,000 per person, will help you to exempt most of what you own if not all of it.
Exemptions aren't always straightforward. In Washington State, you need to have been a resident for at least 2 years to use Washington state exemptions. If not, then you are stuck with federal exemptions, which, depending upon your situation may not be such a good thing. Then there is the timing of exemptions. If you file bankruptcy 1214 days after purchasing a house you could be leaving hundreds of thousands of dollars on the table, and you could potentially lose your house if you have enough equity. That’s why people want to wait at least 1216 days after purchasing their home, if they have more than $125k of equity–yes, I added an extra day to the 1215 day rule.
It’s easy to get lost in exemption laws, which is why you really do need to read the laws about exemptions. See RCW 6.15.010.
The RCWs are pretty good spelling out what the trustee cannot touch. A good example is child support. The trustee cannot touch “Any past due, current, or future child support, alimony, or spousal support paid or owed to the debtor, which can be traced.” But there are other examples: the trustee cannot touch any individual’s “tools, instruments, materials, and supplies used to carry on his or her trade” assuming these items do not exceed “$15,000 in value.”
But what about that $9k CD you have in the bank? Well, the RCWs have something to say about that as well. “(ii) In a bankruptcy case, any other personal property, except personal earnings as provided under RCW 6.15.050(1), not to exceed $10,000 in value. The value shall be determined as of the date the bankruptcy petition is filed.” This means that you can protect $10k work of stuff, which includes money in the bank and other items not otherwise exempt. A married couple in a joint case can stack to the exemption and protect $20k of personal property.
Nothing here is legal advise.
