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What are exemptions in Chapter 7 bankruptcy?

| Apr 15, 2021 | Chapter 7 Bankruptcy

Mississippi consumers who are overwhelmed by their financial obligations might have an out through Chapter 7 bankruptcy. This requires debtors to sell off their non-exempt property through a trustee. The trustee values the assets and uses the funds from sales to pay creditors. However, the debtor does not have to relinquish all assets to the court.

Assets under Chapter 7 bankruptcy

Assets are classified as exempt or non-exempt, and the debtor must list them on Schedule C. A non-exempt asset is property or goods that the court may sell, or non-essential items. Non-exempt assets may include valuable art collections, second homes or vehicles with enough equity, jewelry, expensive clothing, and valuable family heirlooms.

Exempt asset commonly refers to essential assets that cannot be sold through the trustee. Exempt assets include a certain amount of equity in primary homes and vehicles, necessary clothing, necessary work tools, and pensions.

How exemptions work

Each state has their own list of exempted assets, but some states allow debtors to choose the federal ones. However, debtors cannot use both, and they must have lived in their current state for two years. A handful of states including Mississippi do not have the option of federal bankruptcy exemptions.

To determine if a home or vehicle is exempt, the debtor should figure the equity left in the property. Equity equals the current mortgage or payment deducted from the current value. If the mortgage is $40,000 and the home value equals $60,000, it leaves $20,000.

The Mississippi Homestead Exemption allows debtors to exempt $75,000 of equity, and debtors should reference the exemption amount. If a home or vehicle does not have enough equity to get exempt, the debtor may use the wild card exemption.

Chapter 7 bankruptcy also enacts the automatic stay which prohibits further collection action. While Chapter 7 is simpler than most types, a debtor still may benefit from having the assistance of an attorney throughout the process.