This is one of the most common questions from potential clients, especially from people who want to keep their house and car. A potential loss of property is also a real concern of clients who have managed to put aside retirement money is their 401(k) plans, government or private pensions, or in other retirement investments.
The good news is that a substantial portion of your real estate, personal property and retirement money is safe and sheltered from the reach of the Bankruptcy Court by virtue of a Georgia law called the "exemption law." In a nutshell, the exemption law sets out specifically what you can protect if you file a bankruptcy
Exemption law is Georgia law, not federal law
First of all, you might be interested to know that the law controlling exactly what property you can exempt from bankruptcy is Georgia state law, rather than federal law. Even though your bankruptcy case will be filed in federal court, the Bankruptcy Code permits Georgia and the other states to set their own rules for exempt property. Until recently, the Georgia exemption law was one of the toughest in the country. A few years ago, however, the Georgia legislature liberalized the exemption law - which is a benefit to people filing for bankruptcy. Because the Georgia exemption law continues to offer less protection for your property as compared to the exemption laws in other States, the 2005 changes to the bankruptcy laws do not affect Georgia exemption rules much. The Georgia exemption law may be found at the Official Code of Georgia Section 44-13-100. Click to see a copy of the Georgia bankruptcy exemption statute.
Examples of property you can exempt
The exemption law operates by identifying certain types of property that cannot be seized by the trustee or creditors in a bankruptcy. For example, the first $21,500 of equity in real estate is exempt. For a married couple, filing jointly, the real estate exemption is doubled to $43,000.
$5,000 of household goods such as televisions, furniture, electronics, etc. are exempt (double this if filing jointly). However, no one item should be worth more than $300. Thus, a standard 27 inch television is not going to be a problem, but a new four foot high definition TV could be a problem. When determining value, consider what the item would bring at a garage sale or at auction. E-bay or the classified ads are a good place to find sample values.
Another important exemption has to do with retirement plans. The good news here is that the bankruptcy judges in Georgia have determined that 401(k) plans are exempt as are pensions. Generally, if the retirement plan has a penalty for early withdrawal it is probably exempt. A debtor could theoretically discharge $50,000 of credit card debt, while keeping his $100,000 401(k). This may seem outrageous, but Congress has considered the arguments of the lending industry vs. the public policy of encouraging personal retirement plans and a leading Georgia case, the Hipple case, specifically held that a qualified IRA with anti-alienation provisions, was not property of the bankruptcy estate and therefore exempt.
The exemption law also permits you to exempt $3,500 of equity in a vehicle. Thus, if you have a vehicle worth $10,000 and you owe $8,000, you have only $2,000 of equity, all of which is exempt.
You can apply any unused portion of your real estate exemption to gain additional exemptions. For example, if you have a car worth $15,000 and you owe $7,000. You would have $8,000 of equity. Use the $3,500 exemption and you still have $4,500 of non-exempt equity. You can use $4,500 of your real estate exemption to completely shelter your car.
What if the value of your property exceeds the exemption limits?
Now, let's look at what happens if your property exceeds your exemptions.
Let's say you have a $15,000 vehicle that is paid for. You can use $3,500 of your vehicle exemption plus $5,000 of your real estate exemption (if you haven't used it up on real estate). $8,500 of your car is exempt, but $7,500 is not.
Chapter 7 might not work for you in this situation - the Chapter 7 trustee would move to seize your equity by taking title to the car, and selling it. You would get $8,500 from the sale, but the Ch. 7 trustee would keep the remaining $7,500 and distribute it to your unsecured creditors. In this situation you would have the option of "buying out" the trustee's interest if you can find a friend or relative who will give you the funds to pay the trustee.
In a Chapter 13, your non-exempt equity would be a factor in determining what percentage repayment you would make to your unsecured creditors. For example, if you have $15,000 in unsecured debt and $7,500 in non-exempt equity, you would have to pay back at least $7,500 (50%) to your unsecured creditors.
The Georgia exemption law is a key factor in determining whether bankruptcy makes sense for you and, if so, whether you should file Chapter 7 or Chapter 13.
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