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Bankruptcy Alphabet: E is for Exemptions

By Cathy Moran

Bankruptcy exemptions

E stands for exemptions in my Bankruptcy Alphabet. Exemptions describe the possessions you get to keep when you file bankruptcy.

E could also stand for Exception, since exemptions are the only place in bankruptcy law where the law is explicitly different from state to state.

Exemptions vary

The Bankruptcy Code gave the states the right to prohibit their citizens from using the federal exemptions and to limit them to the exemptions provided by state law. Most of them took the feds up on the offer.

California had it both ways: it denied residents the right to claim the federal exemptions, then enacted California bankruptcy exemptions that mirrored the federal exemptions. Go figure.

Funding a fresh start

The right to keep some assets away from your creditors is grounded in the idea that a debtor needs something with which to start over.

When a debtor designates some piece of property as exempt, it leaves the bankruptcy estate, that mythical pile of possessions that the debtor entered bankruptcy with. Neither the creditors nor the bankruptcy trustee can take exempt property from the debtor.

Exemptions protect the equity in an assets. So, the debtor may end up keeping a house worth lots more than the dollar amount of the exemption because a large part of the value of the asset has been pledged to secure a mortgage loan. The debtor doesn’t have to exempt that part of an asset charged with securing a debt.

There are also unwritten exemptions, or functional exemptions. The laws of economics say that the trustee will not gather up and sell assets with so little value that the costs of sale leave little for creditors. For that reason, debtors often keep more than the exemption system provides because it’s simply too expensive to sell things worth relatively little.

Exemptions trip up too many

Sadly, it is the choice of exemptions where many people who attempt to file bankruptcy without a lawyer get in trouble. It isn’t trouble with the system, it’s trouble in that they short change themselves and leave unprotected something they could have kept despite the bankruptcy, if they had done the exemptions right.

This discourse on Exemptions has been brought to you by the letter “E”.

More about exemptions

California’s new exemption for cash

How the homestead works

Secret exemptions

The ABC’s of Bankruptcy

Consumer protection lawyer Jay Fleischman, who started this letter madness, thinks “e” is for Executory Contract.

Image courtesy of takomabibelot.

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Filed Under: ABC's of bankruptcy, How bankruptcy works

About Cathy Moran

I'm a veteran bankruptcy lawyer and consumer advocate in California's Silicon Valley. I write, teach, and speak in the hopes of expanding understanding of how bankruptcy can make life better in a family's future.

Trackbacks

  1. Bankruptcy Alphabet: F is for First says:
    November 10, 2011 at 7:11 am

    […] be available to pay the claims of creditors.? In the vast majority of cases, the debtor’s bankruptcy exemptions protect everything he […]

  2. Bankruptcy Alphabet: E Is For Executory Contract says:
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  3. Bankruptcy Alphabet: H is for House says:
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  4. E:: Examination-Bankruptcy Debtors Fear This The Most | Bankruptcy Blog from Los Angeles Attorney says:
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  5. Bankruptcy A to Z ? E is for Equity | Marin Bankruptcy Law says:
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    […] there is nothing to protect and should you happen to file for bankruptcy you do not need to use an exemption to protect this […]

  6. E is for exemptions « attorneyaxinn says:
    November 18, 2011 at 12:24 pm

    […] Cathy Moran […]

  7. What You Can Keep When Filing Bankruptcy says:
    November 19, 2011 at 8:22 am

    […] That “stuff” (a legal term, in my office<g>) is more than just the assets that are exempt by […]

  8. Bankruptcy Can Make Retirement Possible says:
    December 3, 2011 at 10:58 am

    […] good thing to come out of bankruptcy “reform” in 2005 was a provision that created an exemption available to everyone who files bankruptcy for up to a million dollars in an IRA.? That’s […]

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  10. C is for Creditors Meeting in the Bankruptcy Alphabet - says:
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    […] order to provide proceeds to the debtor?s creditors. If assets are available, and non-exempt (see here for what this means), then the Trustee may take control of those assets, sell them and distribute […]

  11. Bankruptcy Alphabet: T is for Tension says:
    December 7, 2011 at 7:05 pm

    […] (please tell me about the logic of that approach), now debtors walk out of bankruptcy with their exempt assets to facilitate a fresh start.? Here in Silicon Valley, they often join a start up, or found a […]

  12. E Is For Eligibility In The Bankruptcy Alphabet - says:
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    […] Bankruptcy Alphabet:E is for Exemptions by Cathy Moran, Northern CA […]

  13. "E" Is For Exemptions | Downriver Bankruptcy says:
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    […] California exemptions […]

  14. Bankruptcy Alphabet From A – Z — JC Law Group says:
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    […] Emergency Filing Equitable Distribution Euphoria Eviction Examination Executory Contract Exemptions Exemptions […]

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  16. Bankruptcy Alphabet: E is for Emergency Fund — JC Law Group says:
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    […] Emergency Filing Equitable Distribution Euphoria Eviction Examination Executory Contract Exemptions Exemptions […]

  17. Bankruptcy A-Z: E is for Exemptions | Metro Richmond Consumer, Bankruptcy and Small Business Lawyer | Goldstein Law Group says:
    December 23, 2011 at 5:16 am

    […] is for Executory Contract. E is for Exemptions or Exemptions or Exemptions or Exemptions. E is for Emergency Filing. E is for Euphoria. E is for Equitable […]

  18. G is for “GEE!!!” in the Bankruptcy Alphabet - says:
    January 3, 2012 at 1:56 pm

    […] of your home so that will not be a problem. Your personal property can also be protected under the bankruptcy exemptions so it appears you have no equity […]

  19. H is for Hardship Discharge in the Bankruptcy Alphabet - Philadelphia Bankruptcy Lawyer says:
    January 3, 2012 at 8:41 pm

    […] in your home that exceeded the amount that you we permitted to exempt (learn more about exemptions here and here), you may not meet this […]

  20. Bankruptcy Grubstake Exemption Protects Any Asset You Choose says:
    February 11, 2012 at 2:46 pm

    […] grubstake never appears in the bankruptcy code or the California Code of Civil Procedure where the exemptions available in bankruptcy cases filed in California are […]

  21. Bankruptcy A to Z – E is for Equity | Marin Bankruptcy Lawyer says:
    February 23, 2012 at 12:34 am

    […] For a more detailed discussion of exemptions see attorney Cathy Moran’s article. […]

  22. E is for Emotion : Los Angeles Bankruptcy Law Monitor says:
    February 28, 2012 at 10:14 am

    […] Filing, Exemptions, Executory Contract, and Emergency Fund. Tags: Bankruptcy Alphabet, emotional spending […]

  23. E is for Emotion : Los Angeles Bankruptcy Law Monitor says:
    February 28, 2012 at 10:14 am

    […] Filing, Exemptions, Executory Contract, and Emergency Fund. Tags: Bankruptcy Alphabet, emotional spending […]

  24. Keeping property in bankruptcy | | Stokley Martin Law Group, LLC says:
    October 22, 2012 at 10:10 am

    […] Equity Equity Equity Euphoria Everything Eviction Examination Exceptions to Discharge Exemptions Exemptions Exemptions Exemptions Exemptions Exemptions Exemptions Expenses […]

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