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When you file an individual bankruptcy case under Chapter 7 or Chapter 13, you are permitted to retain your primary home and personal property with certain exceptions. Such assets or property you keep is referred to as exempt, and a creditor with a judgment against an individual cannot take or seize it to pay off the debt.

Most individuals file either a Chapter 7 bankruptcy or a Chapter 13 bankruptcy.  A Chapter 7 bankruptcy is commonly referred to as a “Liquidation” bankruptcy. To be able to file under Chapter 7, you must demonstrate that you do not earn enough income after consideration of specific monthly expenses to repay your debts. This is referred to as the “Chapter 7 Means Test” or the “Means Test.”

In a Chapter 7 bankruptcy non-exempt property is sold to pay your debts. If all of your property is exempt no property will be seized. In return, your unsecured debts are terminated. The term “unsecured debt” refers to debt that is not backed by collateral. The most common example is credit card debt. Mortgages are secured debt and will usually remain after your bankruptcy. In a Chapter 7 bankruptcy case, a trustee is appointed by the Justice Department to administer the bankruptcy estate. This involves reviewing the debtor’s finances, managing the repayment or redemption by the debtor of non-exempt assets, the sale of non-exempt assets, and distributing the proceeds to creditors.

A Chapter 13 bankruptcy is commonly referred to as a “wage earner” bankruptcy. Individuals with regular and reliable income may submit a proposed repayment plan to repay all or some of their debts over a time period of three or five years. Plans are based on income, and the amount and types of debts. In a Chapter 13 bankruptcy case, the trustee performs the same tasks as a Chapter 7 bankruptcy trustee but also manages and reviews the repayment plan. Typically, if a Chapter 13 bankruptcy trustee objects to a repayment plan, the bankruptcy court will not approve the plan.

During the bankruptcy process the trustee may liquidate your non-exempt property to pay off your creditors. If only a portion of the value or equity of the property is non-exempt, you have options. In a Chapter 7 bankruptcy case you must either redeem or repay the non-exempt portion immediately or enter into a short-term payment plan. Otherwise the Chapter 7 Trustee may seize the property and sell the property to pay your creditors. The exempt portion of the proceeds will be paid to the Debtor. In a Chapter 13 bankruptcy case you may repay the value of your non-exempt assets through your repayment plan or surrender the non-exempt property to be sold by your bankruptcy trustee.

The value of the property you may keep in your chapter 7 bankruptcy or chapter 13 bankruptcy is determined by the exemptions you choose use. You may choose to use Federal bankruptcy exemptions or state bankruptcy exemptions. There are advantages to each and the selection should be made based on individual needs.

Federal v. Massachusetts Exemptions & the Homestead Exemption

The Massachusetts bankruptcy exemption for your home or the “homestead exemption” is much larger than the Federal bankruptcy homestead exemption. The “homestead exemption” permits you to protect the equity in your home from creditors. This only protects your interest in a primary residence and does not protect vacation homes or investment properties. If your primary residence is also a multi-unit dwelling, the exemption covers up to a four-unit dwelling. You must live in the home to claim this exemption.

If you file a homestead exemption form in your County’s Registry of Deeds, you may exempt up to $500,000 in equity. Otherwise, the exemption only covers the first $125,000 in equity. The Federal exemption only covers the first $23,675 in equity.

Common Massachusetts Bankruptcy Exemptions

The following is a brief outline of some of the major and most commonly used Massachusetts Bankruptcy Exemptions for personal property or assets:

• $7,500 – Motor Vehicle
• $1,225 – Jewelry
• $15,000 – Household Furniture
• $5,000 – Tools of Trade
• $2,500 – Bank Deposits
• Unlimited – Rights to receive alimony and child support
• Unlimited – Life Insurance (if the proceeds are payable to a dependent)
• Unlimited – Most Public benefits and Retirement Account or Benefits. Certain exceptions may apply to contributions to IRAs made prior to the bankruptcy filing.
• Wildcard Exemption – Up to $1,000 plus $5,000 of the unused portion of your automobile, household furniture, and tools of trade exemptions.

Federal Bankruptcy Exemptions

The following is a brief outline of some of the major Federal Bankruptcy Exemptions for personal property or assets:

• $3,775 – Motor Vehicle
• $1,600 – Jewelry
• $12,625 – Household Goods (furnishings, appliances, clothes, books, animals, crops, musical instruments). No individual item may exceed $600 in value.
• $2,375 – Tools of the Trade (including implements and books).
• $12,625 – Life Insurance Policy (loan value).
• $23,675 – Personal Injury or Medical Malpractice awards with exceptions.
• $1,283,025 – IRAs and Roth IRAs – Individual Retirement Accounts
• Unlimited – Retirement Accounts (except IRAs) that are exempt from taxation.
• Wildcard Exemption –
  • $1,250 plus $11,850 of any unused portion of your homestead exemption
  • The wildcard exemption may be applied to any property you own, and maybe used to avoid repaying the non-exempt equity in the property listed above.

There is no need to dip into savings. Being proactive with bankruptcy may protect your personal assets such as your home, car, and retirement accounts from your creditors.

If you have further questions about filing bankruptcy in Massachusetts, please contact Geller Benjamin, LLP, or visit our page to learn if bankruptcy is right for you.

WARNING: THIS POST IS AN ADVERTISEMENT FOR GELLER BENJAMIN, LLP. THE INFORMATION CONTAINED HEREIN DOES NOT CREATE AN ATTORNEY CLIENT RELATIONSHIP AND SHOULD NOT BE RELIED ON AS FORMAL LEGAL ADVICE.

DEBT RELIEF AGENCY – GELLER BENJAMIN, LLP IS A FEDERALLY RECOGNIZED DEBT RELIEF AGENCY THAT OFFERS LEGAL REPRESENTATION UNDER THE UNITED STATES BANKRUPTCY CODE.