How Bankruptcy Exemptions Work
People generally understand what bankruptcy is but often do not understand how Maine bankruptcy exemptions work to protect their assets. “Will I lose all my assets if I file for bankruptcy?” is a common question when speaking with clients. Thankfully, I can tell the client (and now you) the answer is no. When you file bankruptcy a certain minimum level of assets are protected from creditors. The purpose of this post is to explain how bankruptcy exemptions work in Maine. I will also explain the benefits and risks of exemption planning.
What are bankruptcy exemptions?
Exemptions allow you to leave bankruptcy with certain assets protected from creditors. Bankruptcy is meant to allow you a fresh start, free of burdensome debts. If you left bankruptcy with no assets than your “fresh start” isn’t worth much. You would have to obtain loans or other credit to get back on your feet, which defeats the purpose of filing for bankruptcy in the first place. So in a nutshell, exemptions protect you from starting from scratch.
In Maine, the state exemption laws also apply in bankruptcy. Maine opted out of using either the Federal exemptions or allowing the use of either Federal or Maine exemptions. This means that for federal and state purposes you receive the same protection against creditors. You can find Maine’s general exemption scheme at 14 M.R.S.A. Sec. 4422. Now there are other Federal and Maine laws that exempt other property but to keep things simple when I say exemptions I am referring to Sec. 4422.
Here is a sampling of some of the items protected by Maine’s bankruptcy exemptions:
- $47,500 in equity in your personal residence, which increases to $95,000 if you are over 60 years old; if you are married and you both own the home jointly then that amount is doubled.
- $5,000 in equity in one motor vehicle.
- $200 in equity per item in any household goods or clothing; if you are married and jointly own the property than you can exempt up to $400 per item.
- $750 in jewelry; an unlimited amount in your wedding band or engagement ring.
- $5,000 in equity in a debtor’s tools of the trade (i.e. assets used in a business).
- An amount “reasonably necessary for the support of the debtor and any dependent of the debtor” in a retirement plan or IRA.
With the exception of your retirement assets, Maine’s exemptions tend to be a bit stingy but for most people they are still enough to protect all of your assets from creditors.
Now exemptions are not automatic and you need to properly claim them on your bankruptcy petition. Schedule C of the bankruptcy petition provides space for you to claim an exemption in your assets. Easier said than done. You need to claim the proper amount of the exemption and point to the relevant exemption provisions or you might face a challenge by the bankruptcy trustee. Exemptions is an area that often trips up debtors who file without an attorney and so if you are considering filing on your own than you should read Sec. 4422 carefully to make sure you have covered all of your assets to the fullest extent possible.
Exemption planning in bankruptcy
Now that we have talked a bit about what exemptions are, let’s talk about exemption planning. Exemption planning is nothing more than analyzing your situation for opportunities to maximize your exemptions. Understand that your assets are not set in stone. Some amount of time will pass from the point where you start working on the petition and when you file your petition. Your non-exempt assets, meaning those assets not protected (in whole or part) by an exemption, you may be able to convert them to exempt assets. So exemption planning is just moving your assets from one bucket to another to keep it from your creditors.
So how does this exemption planning work in practice? Let’s say you have $2,000 in cash. Under Maine law that is for the most part non-exempt. You could invest that $2,000 in fixing your home’s roof (remember Maine allows you to exempt up to $47,500 in equity in a home) so in one fell swoop you turned $2,000 of non-exempt fund into $2,000 of exempt equity in a home.
Be careful though. Exemption planning is not wrong but aggressive exemption planning can land you in hot water with the US Trustee. For example, if you took $40,000 in cash and bought your wife a new wedding ring right before you file bankruptcy, that’s a problem. While you may think this example sounds silly, it proves a point. If you, the debtor, start converting large sums of money or non-exempt property into exempt assets then you may have gone beyond acceptable exemption planning. You need to remember that pigs get fed, hogs get slaughtered! Speak with a qualified bankruptcy attorney if you need to protect non-exempt assets from creditors.
We talked a bit about Maine’s bankruptcy exemptions and how they work. We also talked about how you can use exemptions to your advantage to protect assets from creditors through exemption planning. Exemptions are an easy concept to explain but there are still traps for the unwary. If you are considering filing bankruptcy and you have questions about how exemptions can protect your assets, give me a call or email me using our contact form.