Bankruptcy Basics – Exempt Property

In a traditional Chapter 7 liquidation bankruptcy, the court will gather all of the debtor’s property to eventually sell at auction. The proceeds from the auction sale are then disbursed to the debtor’s creditors to satisfy existing debts. Once all of the auction proceeds are disbursed, the debtor is discharged from bankruptcy.

While this process is seemingly straightforward, a consumer considering bankruptcy might wonder: can the court sell all of my property? The short answer to this question is no.

Certain property is exempt from sale at auction, and the debtor who filed bankruptcy is permitted to keep some of her property. These “exemptions” reflect an underlying policy of United States bankruptcy law – we want to leave every debtor with enough basic property to have a reasonable chance to successfully emerge from bankruptcy. In other words, exemptions help provide a debtor with a fresh start.

In Colorado, the following types of property are exempt from sale, up to a certain dollar amount, in a Chapter 7 liquidation bankruptcy[1]:

  • Homestead: real property, mobile home or manufactured home you occupy up to $60,000 or $90,000 if occupied by an elderly (60+) or disabled debtor or spouse
  • Insurance Benefits: disability benefits up to $200 per month; if lump sum received, the entire amount is exempt
    • Includes group life insurance policy or proceeds
  • Pensions: ERISA – qualified benefits, including IRAs
  • Personal Property:
    • Clothing up to $1,500;
    • Food and Fuel up to $600;
    • Household goods up to $3,000;
    • Jewelry and articles of adornment up to $1,000;
    • Motor vehicles used for work up to $3,000;
    • Pictures and books up to $1,500;
    • Full amount of any federal or state earned income tax credit refund
  • Tools of the Trade: Horses, mules, wagons, carts, machinery, harness, and tools of farmer up to $25,000
    • Also includes the library of a professional up to $3,000 or stock in trade, supplies, fixtures, machines, tools, maps, equipment, books and business materials up to $10,000
    • Also includes livestock and poultry of farmer up to $3,000

A consumer might wonder what happens if she owns a piece of property that falls into one of these exemption categories, but the property is worth more than the dollar limit of the exemption. For example, a debtor owns an item of jewelry that is valued at $1,500, but Colorado law allows an exemption for jewelry only up to $1,000. In that case, the jewelry would be sold at auction for $1,500. The debtor would receive $1,000 from the sale, and the remaining $500 would be distributed to the creditors.

Importantly, property that is subject to a security interest affects whether the debtor may successfully claim an exemption. For example, let’s say a debtor who has filed for bankruptcy owns a car worth $3,000. When the debtor purchased the car, the dealership provided financing in exchange for a security interest in the car in the amount of $2,000. In that case, the car would be sold for $3,000, the dealership would receive $2,000, and the debtor would keep the remainder up to the limit of the exemption.

Finally, there is also something in the bankruptcy context called “exemption planning.” Let’s say a debtor knows that she will file for bankruptcy within the next few weeks. Aware of the exemptions available to her, the debtor converts non-exempt property into her homestead in order to maximize the amount of exemptions available. While some courts have found this type of conduct permissible, the debtor walks a fine line in these situations. If a court finds that the debtor has funneled assets into exempt property with the intent to defraud creditors, the court may completely prohibit the debtor from discharging any of her debt, or even dismiss the debtor’s case entirely.

[1] This is not an exhaustive list. For the full list of exemptions under Colorado law, see Colo. Rev. Stat. §13-54-102(1).

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