This is a common question and a very important one. In fact, it is one of the top 5 questions we are usually asked in a bankruptcy consultation. Here’s how it works:
In North Carolina, we use the same exemptions in bankruptcy court that we use in state court. Remember, bankruptcy court is federal court. If you are being sued because you owe a debt, you are probably being sued in state court. So, what are exemptions? Exemptions are the tools that state court judges use after the lawsuit process to determine whether or not your property can be liquidated (or sold) to pay off the judgment debt. (Here is a link to the exemptions form from the North Carolina Administrative Office of the Courts website: http://www.nccourts.org/Forms/Documents/927.pdf). The 2 most common exemptions are your real property and motor vehicle exemptions. If you click on the link to the exemption form, you will find them listed under #5 and #7.
Let’s start with the real property exemption since most clients are primarily concerned with keeping their homes. The real property exemption allows you to exempt your personal residence from liquidation as long as you have less than $35,000 in equity in it. If you are married, you and your spouse both get $35,000 in equity exemption so your total exemption amount is $70,000.00.
In plain language, that means your house is protected in bankruptcy (or if you are being sued), as long as it has less than $35,000 in equity for a single client, or $70,000 for married clients. Let’s use some numbers to make this a little more simple to understand, if your house is worth $100,000 and you owe $80,000 on it, you have $20,000 in equity. Your house is worth more than you owe on it but not more than the than the equity exemption allows. Also, married couples who own their house together may be able to take advantage of the Tenant’s by the Entireties exemption. The advantage of this is that there is no limit to the equity exemption amount as long as you do not have any joint debt. This concept only applies to real estate and only to married couples.
The motor vehicle exemption works the same way. Each client gets $3,500 in equity exemption in a motor vehicle. In plain language, this means that your car is protected in bankruptcy (or if you are being sued), as long as it has less than $3,500 in equity for a single client or $7,000 for married clients. Here are the numbers: if you are purchasing a car for $10,000 and you owe $5,000 on it, then you have $5,000 in equity in your car. If you are filing bankruptcy by yourself, you can only exempt $3,500 of the equity in your car and you are $1,500 over your exemption limit. If your spouse is filing as well, he or she can exempt the remaining $1,500.
There are a number of other aspects of property exemptions that are important to understand before you file for bankruptcy (or if you are being sued). Like personal property exemptions for you and your dependents, tools of the trade, term life insurance policies, certain retirement accounts and/or pensions, earnings received in the preceding 60 days, and personal injury proceeds. Another exemption concept that you should be aware of is the wildcard exemption. If you do not need to use your real property exemption, you can use the first $5,000 per client to exempt any property you choose. You can use that exemption to protect a second car or something like a certificate of deposit, or etc.
The exemption analysis can be a complicated one and this blog is only intended to give general information. If you have additional questions that we can answer for you or you would like to discuss whether or not bankruptcy is an option for you, contact us today for your free consultation.