Under chapter 7 bankruptcy law, you are allowed to keep certain amounts of equity in each category of assets. Any amounts exceeding those allowed limits, are subject to being liquidated by the trustee for the benefit of the creditors.
In theory that is how it is supposed to work. In practice though, it is very rare for a consumer debtor to have nay asset liquidated by the trustee.
The reason is that almost all of your assets fall within the allowed limits and so are beyond the reach of the trustee for purposes of liquidation.
The second reason that consumers debtor are perfectly safe with regards to their assets is that there is a high bar that the trustee has to overcome in order to liquidate an asset.
It comes down to the fact that trustees liquidate only assets that are worth their time. For example if you have a 1990 Ford Pinto valued at $200 and for which there is not exemption applicable, no trustee will be interested in wasting their time with it.
You may already have an idea what exemptions are but most people do not really understand how to apply them.
Exemptions apply to equity, not to market value.
This means that the limit prescribed by an exemption does not limit the value of an asset that can be protected. Instead it applies to the equity in the asset.
What is Equity?
Equity is the value of an asset minus the debt secured by the asset (Equity = Value - Debt).
Here are some examples:
(A.) You own a Car that can be sold today for $20,000 but you owe $15,000 to the lender for the Yacht. Your equity is $5,000 ($20,000 - $15,000 = $5,000)
(B) You own a house valued at $500,000 in today's market but you owe $600,000 to the mortgage company on the house. Your equity is less than zero, or negative. In order words, you do not have any equity. ($500,000 - $600,000 = nothing)
Hypothetically, if the exemption in example B above says that you can keep up to $100,000 of equity in your house, then you are not at risk of losing your house to the trustee because your equity of zero is less than $100,000.
Conceivably, it is easy to see how a person can keep file chapter 7 bankruptcy and still keep their house worth $10 million dollars. That would be the case if they have it mortgaged to the hilt and have no equity.
So in applying this lesson to your own chapter 7 bankruptcy, think of your equity, not the market value of your debt.
What about a yacht worth $2,000,000 yacht securing a purchase loan of $1,950,000? You will not have to worry about that either even if there are no specific exemptions for yachts.
The reason is that while the equity may be $5,000 on paper, the trustee is no fool. By the time the trustee has found an auction house who will sell the Yacht and has paid all the storage and transportation fees as well as commissions, the net proceeds of the sale will not even be enough to pay off the lender on the yacht, let alone to repay other creditors.
It may not sound fair that a supposed rich woman can keep a $2 million yacht while a poor working woman could be at risk of losing her $7,000 car that is owned free and clear. It is all about the equity.
This principle applies to most of the junk that people collect. Some of them may not be protected by exemptions but they are worthless to the trustee.
Full Service Bankruptcy and Exemptions
When you select our full-service bankruptcy product, you do not have to worry about the exemptions because they are integral to the product. We have you covered.
Managed Software and Exemptions
If you select any of our bankruptcy software products, we put all the exemptions at your fingertips. There is no leaving the software to hunt down exemptions. Just point and click and you are done.