An exemption is an amount that is applied against the value of each property to determine whether the chapter 7 trustee may sell a particular property and/or to determine the amount that must be paid to general unsecured creditors in a chapter 13. In New Jersey, a bankruptcy debtor may either use all of the federal exemptions or all of the state exemptions, but not some of each. In virtually all matters, the bankruptcy debtor applies only the federal exemptions. The bankruptcy code provides specific exemptions that are applied to specific property for one person.

If a husband and wife file for bankruptcy, each spouse can can use all of the exemptions. If they own property jointly, each of them can apply their own exemption for the joint property.

All of the debtors’ property values must be included on the bankruptcy petition. For each property and/or property category, the bankruptcy code allows an individual to apply and subtract from the equity (property value minus secured interest) the amount of the exemption. If the exemption amount is more than the property’s equity, the individual may keep that particular property and the chapter 7 trustee may not sell the property. If the equity in the property has a higher value than the exemption amount, the trustee may sell the property. However, if the chapter 7 trustee sells the property, the debtor is entitled to receive no less than the exemption amount, from the sale’s proceeds.

The chapter 7 exemption analysis allows the debtor to substract the cost of sale from the equity.

A chapter 13 trustee will never sell a debtors’ property. However, in a chapter 13, the debtor must pay to the unsecured creditors, pro rata, at least the amount that a chapter 7 trustee would have received from the sale of any of the debtor’s assets, if the debtor filed a chapter 7 case. Therefore, the exemption analysis must be performed on each of the debtor’s assets in a chapter 13, as well.

The exemption for a debtor’s residence is $25,150.00. This means that each debtor may apply $25,150.00, towards the equity of their residence, if both debtors own the property.

Example:

Value of the residence

• Value of Property                                                                 $300,000.00
• Mortgage payoff                                                                   $120,000.00
• Value minus payoff (equity)                                              $180,000.00
• Estimated Cost of Sale (10% of value)                             $30,000.00
• Equity minus cost of sale                                                    $150,000.00

• Exemption for husband (one part homeowner)            $25,150.00
• Exemption for wife (one part homeowner)                    $25,150.00
• Equity minus cost of sale and exemptions                      $99,700.00

In the above listed example, the chapter 7 trustee could sell the residence and receive $99,700.00 from the sale. The proceeds would pay each debtor $25,150.00, with the balance to be paid to the creditors, after costs. If the house value was $200,300.00, which is $99,700.00 less than $300,000.00, the chapter 7 trustee would not be permitted to sell the house.

If the debtors filed a chapter 13 case, the unsecured creditors would be paid at least $99,700.00 pro rata, of the unsecured debt, or 100% of the debt, if the unsecured debt total is less than $99,700.00. Please note there is additional criteria to determine the amount that must be paid to the unsecured creditors in a chapter 13 case.

The federal exemptions include two wildcard exemptions, which permit each debtor to use $1,325.00 towards any one property and up to $12,575.00 of the unused portion of the homestead exemption, towards any property, in any amount. This means that if the equity of any property is in excess of the exemption for that particular property, the debtor may apply the additional  available wildcard exemption amount.

The Wild Card Exemption may only be applied, if there is a remaining balance after the application of the $25,150.00 homestead exemption. For example, if a debtor applies $20,000.00 of their homestead exemption, he can use $5,150.00 of the Wild Card Exemption, which is the difference between $25,150.00 and $20,000.00. Additionally, he can use $1,325.00, as well.

The exemption for one owner of one vehicle is $4,000.00.

Example:

• Value of Auto                                                                     $8,000.00
• Minus Auto exemption                                                  -$4,000.00
• Minus Wild card exemption                                         -$4,000.00

The above example used all of the auto exemption and only $4,000.00 of the “Wild Card” exemption. Based on the above example, the chapter 7 trustee would not be permitted to sell the vehicle because the entire auto value is exempt.  Since $4,000.00 of the “Wild Card” exemption is used, there must be at least $4,000.00 available of the homestead exemption that is not used. If the debtor in the example, used all of the $12,575.00 homestead exemption, only $1,325.00 of the “Wild Card” exemption would be available. In that scenario, the automobile would not be fully exempt and the trustee would be able to sell the vehicle.

In a chapter 13 case, this analysis must be applied to every piece of property to determine how much the unsecured creditors-

will be paid in a chapter 13 based on the exemption criteria, only. There are other criteria that determines the amount that must be paid to unseucred credeitors in a chapter 13 case.

The following is a list of some of the federal exemptions:

• Aggregate value of all Jewelry – $1,700.00
• Aggregate value of all household goods $13,400.00
• Tools of the trade – $2,525.00
• Personal injury payments for pain and suffering – $25,150.00
• The right to receive payments for economic loss is 100% exempt.
• Life insurance contract owned by the debtor is 100% exempt
• The debtors right to receive certain benefits, such as social security, unemployment compensation, public assistance, veteran’s benefits, alimony, and, support are 100% exempt.
• A debtor would use the New Jersey bankruptcy exemptions under unusual situations, such as if a debtor had a substantial insurance claim to be paid. The New Jersey exemptions exempt the entire amount in certain situations, where the federal exemptions do not. However, under such a scenario, the debtor could expose for sale other property that the trustee may be entitled to sell.

Consult a New Jersey Bankruptcy Attorney

Skillful application of the federal bankruptcy exemptions can make a significant difference in what property you can keep and what property you must give up. A NJ bankruptcy attorney that knows the bankruptcy laws, can help you with your bankruptcy questions. Contact Robert Manchel today for a free and confidential evaluation of your situation.