When individuals experience financial trouble and must consider filing for Chapter 7 bankruptcy, they often wonder whether or not they are going to lose their homes. In many cases, individuals contemplating bankruptcy are also facing the threat of foreclosure due to their inability to pay their mortgage. In instances in which an individual owns the residence they are living in, they may worry that they will be required to sell their home in order to pay their creditors the money that they owe them. In order to help protect an individual from surrendering their home and its value, the federal and state governments have established a homestead exemption.
Not all states have developed a homestead exemption, but the majority of them offer some form of protection to homeowners. If an individual signs a declaration of homestead, a portion of the value of their primary home may be protected under state bankruptcy exemption laws. A declaration of homestead is signed in order to obtain some form of financial protection under the law. An individual who owns a home may choose to authorize a declaration of homestead in order to protect a percentage of their property in the event that they accumulate serious debt and are compelled to compensate creditors through the sale of personal property.
The percentage of the property value that is protected ranges a great deal from one state to another. Some states offer little to no protection to homeowners, and others protect a large portion of a home’s value. In order for an individual to receive a declaration of homestead, the property that a petitioner is seeking to protect must be his/her primary residence. Vacation homes and second residences are not protected under the homestead exemption. The type of property that can be included in a declaration of homestead includes houses, condominiums, and mobile homes. It should be noted the declaration must be signed in front of a notary.
Just because an individual has authorized a declaration of homestead does not mean that they will not be forced to sell their home. If an individual is yet unable to make his or her monthly mortgage payments, the creditor can take steps to foreclose the home. A homestead exemption does not mean that an individual will be permitted to remain in their home, or that their home will not be sold. It means that a certain percentage of a home’s value will be protected.
For example, the state of Massachusetts has established a homestead exemption of $300,000. If an individual owns a home that is worth $325,000, and they owe creditors $50,000, he/she could be forced to sell their home in order to pay their debts to the creditors. However, once the home is sold, $300,000 dollars from the sale will go to the individual, while only the remaining $25,000 will be distributed amongst the individual’s creditors. Most states’ homestead exemption only protects a small percentage of a home’s value. However, a few thousand dollars may be extremely important to an individual who files for bankruptcy and who is forced to begin their life again.
In many cases, individuals experience insolvency before
they file for bankruptcy. This means that they do not have the necessary assets
to pay their creditors for the debs that they owe. Even if creditors take legal
action against an insolvent party, their efforts would be futile because the
defendant would not have the necessary assets to compensate their creditors.
An individual who is insolvent is deemed to be
“judgment proof” because, even if a judgment is made, the defendant
will not have the necessary resources to fulfill the conditions of the
judgment. In general, an individual who is considered to be judgment proof has
very few assets to their name and the property that they do posses is either
worth very little, or it is exempt property.
Individuals often avoid filing for bankruptcy
because they fear that they will lose every possession that they own. However,
many people do not realize that Federal and
State bankruptcy exemption laws permit the
majority of individuals who file for bankruptcy to keep most of their valuable
When individuals are forced to contemplate filing for bankruptcy, their first
consideration is often whether or not they will be permitted to keep their
home. Without a house to live in, of course, an individual’s family will not
have a safe and stable environment to return home to. A house provides people
with security, stability, and protection. The thought of having that taken away
is cause enough for severe anxiety and depression. Individuals who purchase a
house often invest their entire life savings into the home, leaving them with
diminished monetary funds.
The homestead exemption was developed in order to protect
individuals who are struggling financially from losing their entire investment
(i.e. the house). This bankruptcy exemption cannot protect a home from being
foreclosed or sold, though.
Tools of Trade Exemption
Many individuals who are suffering from extensive financial debt and who should
utilize the bankruptcy system refuse to consider filing for bankruptcy due to
the negative ramifications that are often associated with this form of
financial protection. They fear that they will be required to surrender all of
their personal property to a trustee, who will then sell the items at an auction
and use the profit to compensate lenders for a portion of the money that they
However, if an individual loses all of their
personal assets and essential resources, they will find it very difficult to
begin a new life, especially when the cost of living is so expensive.
Therefore, bankruptcy laws have been designed to protect a percentage of an
individual’s personal property.
One of the types of property that is
protected under bankruptcy exemption laws is tools of trade, or items that an
individual utilizes for work. The objects that this exemption may include
varies a great deal. If an individual can prove that an item is essential to
their job, they can protect that set under the tools of trade exemption.
“Judgment Proof” Status
In general, an individual files for
bankruptcy because they cannot afford to pay the debt that they have accrued.
Truly, it is not difficult for someone to accumulate an unmanageable amount of
debt, even if he/she is usually a responsible and cautious individual. This is
especially true in today’s economy. With increasing rates on unemployment,
people are finding it difficult to make ends meet and they are struggling to
pay their debts. Some people have fallen so far behind in their various
installment payments that they are facing foreclosure
Chapter 7 exemption laws have been established in order
to ensure that an individual who chooses to file for bankruptcy does not have
to give up all of their valuables and important personal belongings. In their
breadth, Chapter 7 exemption laws protect a wide range of objects,
including homes, motor vehicles, jewelry, and tools of trade.
The Federal Government
exempts up to $1,750 worth of tools of trade. The term “tools of
trade” refers to
any group of items an individual uses for work, or any property that is
essential to a petitioner’s small business. Tools of trade themselves may
incorporate a wide variety of objects. Depending on a petitioner’s career, this
Chapter 7 exemption may include books, computers, motor vehicles, or paint brushes.
If an individual can prove that his/her motor vehicle is
essential for work, they may be permitted to protect the vehicle under the
tools of trade exemption, as opposed to the motor vehicle exemption. This may
be beneficial to a petitioner because, in many states, the tools of trade
exemption offers more monetary protection than the motor vehicle exemption.
However, this Chapter 7 exemption is generally only successful in protecting
motor vehicles when a petitioner utilizes the vehicle to make deliveries
or makes a living as a traveling salesman.
While most petitioners are required to protect their
computers and other electronic devices under the Chapter 7 exemption for
personal property and household goods, petitioners who are employed
as computer technicians will likely be permitted to protect their
computer under the tools of trade exemption.
The Federal Government
and state governments recognize that many individuals are self-employed and
utilize personal possessions in the course of making an income. Stripping
petitioners of the items that are essential for their job would only hinder
their ability to secure an income. Without a steady income, an individual is at
risk for financial trouble and may once again accrue extensive debt. Therefore,
it is essential to protect any property that may be beneficial in establishing