Chapter 7 bankruptcy is commonly referred to as the “liquidation chapter.” Despite the name, most people who file are able to keep all of their assets and nothing is liquidated. Liquidation only occurs if an asset cannot be exempted in full. More on exemptions below.
All secured and unsecured debts must be disclosed on your bankruptcy schedules. This includes mortgages, vehicle loans, taxes, student loans, credit cards, medical bills, loans from family or friends and any other known or potential liability. Even debts that are nondischargeable must be listed.
A person is obligated to list all assets they own or have an interest in, such as real estate, motor vehicles, bank accounts, retirement accounts, household contents and furnishings, personal clothing and jewelry. It is important to list all assets because federal criminal charges can be filed if a person intentionally omits or misrepresents any information.
Once all assets are listed, exemptions are then applied. In Pennsylvania, an individual has the option to use either the federal bankruptcy exemptions or state exemptions. For most people in Pennsylvania, the federal exemptions provide greater asset protection. There are multiple different categories of exemptions under federal law. The six most commonly used are:
· Personal residence/homestead – $23,675 (11 U.S.C. § 522(d)(1))
· Motor vehicle – $3,775 (11 U.S.C. § 522(d)(2))
· Household contents, furnishings, appliances and clothing – $12,625 (11 U.S.C. § 522(d)(3))
· Jewelry – $1,600 (11 U.S.C. § 522(d)(4))
· Tax exempt retirement accounts – fully exempt regardless of amount (11 U.S.C. § 522(d)(12))
· Wildcard – $1,250 plus up to $11,850 of the unused portion of the personal residence/homestead exemption (11 U.S.C. § 522(d)(5))
The wildcard exemption can be used on any asset.
Assume a person has a home worth $100,000 and that there is a mortgage with a balance of $85,000. If the trustee sells the home for $100,000, there would be approximately $7,000 in sale costs (realtor commission, realty transfer tax, etc.). The mortgage would have to be paid in full, resulting in the trustee netting $8,000 at closing ($100,000 – $7,000 – $85,000). In this situation, the trustee would be unable to sell the home because the person could exempt the $8,000 of net equity using their personal residence exemption. Now, assume there is $50,000 owed on the mortgage. This would result in the trustee netting $43,000 at closing. In this situation, the trustee would sell the home because the maximum the person could exempt is $24,925 ($23,675 personal residence exemption and $1,250 wildcard exemption), leaving $18,075 of unexempt equity ($43,000 – $24,925). Upon sale of the house, the person would receive $24,925 and the remainder would be distributed to the unsecured creditors. This same analysis is used for all bankruptcy assets.