If you are a consumer considering bankruptcy as an option, you likely want to know what assets are protected in bankruptcy. That is because there is a lot of bad information you may hear on the street from friends or family or somebody who is not an expert in the laws of bankruptcy who tell you that you will lose everything you have. The truth is bankruptcy law can be complex and the answer to whether assets are protected in bankruptcy is not cut and dry, but on average, most consumers who file bankruptcy retain all of their assets. Attorney Richard Symmes discussed what assets are protected in bankruptcy on 1150am KKNW and you can listen to that segment here:
Does it Matter if I File Chapter 7 or Chapter 13 Bankruptcy?
Most consumers after consulting with a bankruptcy attorney have an idea of whether they will need to be filing chapter 7 bankruptcy or chapter 13 bankruptcy. There are a few other types of bankruptcy like Chapter 11 bankruptcy that we will not be discussing here as those types of bankruptcy are not typically what is filed by most consumers.
Bankruptcy allows for the discharge of most debts subject to certain exceptions for things like student loans, child support, and restitution to name a few of the exceptions to discharge. Additionally, when a consumer files bankruptcy, they are allowed to use exemptions to protect assets up to a limited amount defined by law. In Washington State we can use Federal exemptions or Washington State exemptions if you have lived in the state for at least 2 years. Most consumers will opt to use the federal bankruptcy exemptions unless there is equity they need to protect in a homestead, in which case the state exemptions may be the better choice for maximum protection of assets.
In a chapter 7 bankruptcy case, assets can be sold to pay unsecured creditors, however a trustee must pay the allowed exemption first. Therefore, if the exemption covers the equity you have in an asset, then a trustee would not be inclined to sell an asset as there would be no money to be made for creditors.
In a chapter 13 bankruptcy case a consumer is in a repayment plan for 3 to 5 years and no assets are taken and sold, however if there is an asset that is not exempt or protected, then the debtor must pay into the chapter 13 plan the amount a chapter 7 trustee may have received had the debtor filed a chapter 7 case.
What Assets Are protected in Bankruptcy under the Federal Exemptions?
The federal exemptions allow for a higher protection amount over the Washington State exemptions in most categories outside of the homestead exemption. The full list of exemptions can be found here. The primary categories are going to be household goods protect, a vehicle and the wildcard protection, not to mention that most retirement accounts should be protected. As of November 2022, the federal bankruptcy exemptions allow for $4,450 of exemption protection in a vehicle or doubled for a married couple that is filing. Household goods are protected at $700/item, up to $14,875 or doubled for a married couple that is filing and up to $15,425 in wildcard protection or doubled for a married couple that is filing that can be used on any asset including cash or money in a bank account. A homestead exemption under the federal exemptions is limited to $27,900 (doubled if married) and if claimed, could impact how much of the wildcard exemption you can use up to $13,950 (doubled if married) if applied to a homestead.
What Assets Are protected in Bankruptcy under the Washington State Bankruptcy Exemptions?
The Washington state bankruptcy exemptions can help debtors protect a primary residence located in Washington if it has significant equity, but other assets will receive less protection than the federal bankruptcy exemptions. If you live in a homestead in Washington and have owned the home for more than 1,215 days it is likely you can protect the equity up to the median value of the home in the county you live in, although there are a few rare exceptions to the rule. As an example, in King county you currently as of November 2022 can protect up to $838,300 of equity in your primary residence. Nonetheless, if you have owned the home for less than 1,215 days, then your exemption amount will be capped at $189,050.
Under the Washington State Bankruptcy exemptions, household good are protected up to $6,500 (doubled if married), vehicles up to $3,250 (doubled if married) and $3,000 in wildcard protection however only $500 in a bank account and $1,500 in cash is protected. There are a few other categories as well in case you own other assets. As you can see the federal exemptions do offer more protection in other categories that are not real estate, but for most people, they will elect to protect their homes and if they have to lose another asset or pay a trustee the difference, they will benefit them more than having to repay all of their debts which may be eligible for a discharge at the end of a bankruptcy case.
As outlined, most people considering a bankruptcy filing will be able to protect most assets and if an asset is not exempt, they can choose to negotiate with a trustee in chapter 7 to pay the difference between an asset’s liquidation value (equity after costs and exemptions are applies) or paying the liquidation value in a chapter 13 bankruptcy.