If you are struggling financially, you may have considered filing for bankruptcy but decided against it because you heard that it would force you to part with your property. However, this widely held belief is not true in most cases, as there are laws in place called bankruptcy exemptions that allow you to keep the majority of your most important property.
How exemptions work
Depending on whether you file for Chapter 7 or Chapter 13 bankruptcy, the exemptions work in different ways. In Chapter 7, the bankruptcy trustee sells your property and applies the proceeds to your debts. However, the trustee may only sell property that is not fully covered by a bankruptcy exemption. As a result, most people who are in a position to file Chapter 7 lose very little (if any) property during the process.
During Chapter 13 bankruptcy, your debts are consolidated into a payment plan. Under the plan, you repay your debts, in full or in part, by making payments each month over a three to five-year period. The amount you must pay each month is tied to the value of your bankruptcy estate. In this type of bankruptcy, the value of your property covered by an exemption is deducted from the value of your estate, which lowers the amount of your monthly payment.
Exemptions available in Tennessee
Both federal and state law list out exempt property in bankruptcy. Although some states let you choose between the two types of exemption, Tennessee law requires you to use the state exemptions, except in certain circumstances.
One of the most important exemptions available in Tennessee is the homestead exemption, which allows you to keep your house in most cases. Tennessee law exempts the following amounts:
- $5,000 for single homeowners
- $7,500 for joint-owners
- 12,500 for single owners over 62 years of age (20,000 if married to a spouse under 62)
- $25,000 if both spouses are 62 years of age
The above amounts apply to the equity-the difference between the value of the property and what is owed-in your home. If the home has a mortgage and the equity is covered by the exemption amount, the home may be kept throughout the bankruptcy process. If the equity is worth more than the exemption, the trustee may choose to sell the property in Chapter 7, but you would be entitled to a cash payment in the amount of your exemption. Of course, you may have the option of keeping your house by catching up on the missed mortgage payments, if you file for Chapter 13 instead.
If the debts are only owed by one spouse and the household is held as a tenancy by the entirety, there is no limit on the exemption amount.
In addition to the homestead exemption, Tennessee law also exempts other important types of property. Under the law, each spouse may claim an exemption in most cases, which, in essence, doubles the exemption amount. Some important exemptions are:
- Up to $10,000 of equity in any personal property (e.g. bank accounts, motor vehicles)
- All pension and retirement benefits
- All workers' compensation, unemployment, Social Security, disability or veterans' benefits
- All necessary clothing
- $1,900 of equity in tools, books or implements necessary to carry out a trade or business
- All life insurance or annuity proceeds
An attorney can help
If you are drowning in debt, you should not let the threat of losing property deter you from considering bankruptcy as a solution. An attorney can fully advise you on how bankruptcy would affect your situation and can recommend a solution that would best allow you to keep your most cherished property.