When you file bankruptcy, your possessions can be taken over by the trustee who uses them to pay your creditors. The trustee can only take those possessions that are not exempt. Bankruptcy law is generous when it comes to providing enough exemptions for you to wipe out your debt and continue your life with security and dignity.
In Washington, people who file bankruptcy can choose between state and federal exemptions. You choose between state and federal exemptions based on what kind of property you have, though you can’t mix some state and some federal. You have to choose one set of exemptions for all your property. These exemptions are similar for a lot of property. For instance, under both set of exemptions retirement plans are 100% exempt. Exemptions are divided among numerous categories of property such as household goods, automobiles, work tools, personal injury awards, jewelry, etc.
In general, federal exemptions are better if you do not have a lot of equity in your home. That is because you can use any unused homestead exemption to as a “wildcard”, which amounts to $11,975. The wildcard covers anything not covered by a specific exemption, usually things like cash, tax refunds or accounts receivable. A wildcard exemption can be combined with other exemptions if you need additional protection. For instance, your automobile exemption under federal law is $3,675. If your car is worth more than that, you can use part of your wildcard exemption to cover the rest. Married couples can combine their exemptions as well.
Washington exemptions provide $125,000 in homestead exemption. The Washington wildcard is only $3,000.
If you still owe money for property like a car or a house, the creditor has a lien on the property. This is known as secured debt because the debt is secured by the right of the creditor to recover the property for non-payment. Liens generally survive the bankruptcy discharge. When you subtract the loan balance from the property value, what is left is called the equity in the property. Of course, the trustee can only go after the equity and that is the only part you have to worry about using an exemption for.
In a Chapter 7, you can keep property you are making payments for by continuing to make the payments during and after your bankruptcy. You may have to file a reaffirmation agreement which excepts the debt from your discharge. In a Chapter 13, you consolidate this secured debt along with your other debt in the bankruptcy plan.
If you have property that is not covered by an exemption in a Chapter 7, you can still file a Chapter 13 bankruptcy and protect that property. You must pay your unsecured creditors as much as they would have received in a Chapter 7 liquidation through the Chapter 13 plan. For instance, if you had $30,000 of property you could not protect, you could pay $500 per month for five years (plus trustee fees) instead.