A key purpose of the bankruptcy code is to provide a debtor with a "fresh start," free of most, if not all, of their debts. Congress did not intend the debtor to receive a windfall, by allowing them to discharge all debts and keep all of their property.
During the administration of a bankruptcy, the trustee gathers the assets of a debtor and sells them to distribute the proceeds to the creditors. The law recognizes that you need some necessary items, like clothes and medical devices, to function in your day-to-day life.
These items are exempt from the trustee. The bankruptcy exemptions cover such necessities as a portion of the equity in a home, some value in a car, some personal property (clothes, jewelry) and various kinds of payments, such as child support and Social Security payments.
You Have To Choose The Type Of Exemption
There are two sets of permissible exemptions under the bankruptcy code, federal exemptions and state exemptions. However, you cannot use both, so you have to decide which set is the most financially advantageous for you to use. An experienced New Jersey bankruptcy attorney can help you determine which one would work best for your specific situation.
Do I Have To Give All My Stuff Back?
Generally, no. Most Chapter 7 cases are filed as no-asset cases, meaning the individual has no assets for the trustee to recover and sell. An asset would be some property you own outright, for example, if you owned an expensive watch or wedding ring.
Say your wedding ring was worth $1000. The bankruptcy trustee could take and sell it, and distribute the proceeds to your unsecured creditors.
Because there is a federal exemption for $1,450 worth of jewelry, the ring would be exempt and the trustee would not claim the ring as property of the bankruptcy estate.
Bankruptcy trustees also may decide not to claim property that is close in value to the exemption limit, as they have administrative costs and must consider how much time and money it will cost them to recover the asset, sell it and distribute the proceeds.
On the other hand, if you owned a paid-for Lexus or BMW, the trustee potentially could claim your vehicle, sell it, pay you the exemption value and distribute the remainder to your unsecured creditors.
New Jersey Exemption vs. Federal Exemptions
A few specific examples of the differences between the New Jersey and federal exemptions are shown below.
Home Equity:
- New Jersey-$0
- Federal-$21,625
Tools of the Trade:
- New Jersey-$0
- Federal- $2,175
Automobile:
- New Jersey-$0
- Federal-$3,450
As is clear from this example, the federal exemptions tend to be more generous than New Jersey's exemptions, but there could be circumstances where an individual could be better off using the New Jersey exemptions.
Such a determination should be based on an overall evaluation of your particular facts. Your bankruptcy attorney can review your financial situation, explain the amounts of specific exemptions and help you choose the most effective exemptions.
