In a traditional Chapter 7 liquidation bankruptcy, the court will gather all of the your property to eventually sell at auction. The money gathered from the auction sale is then distributed to your creditors to satisfy your debts. Once all of the auction money is disbursed, you are discharged from bankruptcy.
While the basics are 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 you are permitted to keep some of your property. These “exemptions” reflect an underlying policy of United States bankruptcy law –to leave every debtor with enough basic property to have a reasonable chance to successfully emerge from bankruptcy. In other words, exemptions help provide you 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]:
- Your home
- Includes real property, mobile homes or manufactured homes
- Up to $60,000 or $90,000 if occupied by an elderly (60+) or disabled person
- Personal Property
- Clothing up to $1,500;
- Food and Fuel up to $600;
- Household goods up to $3,000;
- Jewelry 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
- Insurance Benefits
- Includes disability benefits up to $200 per month, in addition to group life insurance policy
- Pensions
- Includes ERISA – qualified benefits, including IRAs
- Tools of the Trade
- For example: 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, let’s say you own 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.
In some situations, the person or company who sold you the property may not allow you to claim an exemption in bankruptcy. For example, let’s say someone named Alice has filed for bankruptcy. Two years before filing for bankruptcy, Alice bought a car from a dealership. In exchange for providing financing for the car, Alice agreed to allow the dealership to take back the car if she did not make her monthly car payments. With this type of agreement, Alice would not be able to fully take advantage of the exemption available to her.
Finally, there is also something in the bankruptcy context called “exemption planning.” Let’s say a consumer, Alice, knows that she will file for bankruptcy within the next few weeks. Aware of the exemptions available to her, Alice 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, Alice walks a fine line in these situations. If a court finds that Alice has funneled assets into exempt property with the intent to defraud her creditors, the court may completely prohibit Alice from discharging any of her debt, or even dismiss her case entirely. For this and other reasons, it is important to consult an attorney if you are considering filing for bankruptcy.
For those who are considering Chapter 7 liquidation bankruptcy, exemptions will play an important role. It is true that much of your property will be sold at auction if you file for bankruptcy. However, the court cannot take everything you own. Exemptions provide a consumer with the first step towards a fresh start.
[1] This is not an exhaustive list. For the full list of exemptions under Colorado law, see Colo. Rev. Stat. §13-54-102(1).