What are Bankruptcy Exemptions?

Upon filing a petition for bankruptcy relief, nearly all property owned by the debtor becomes property of the bankruptcy estate.  Exemption laws, however, carve out protections for certain property.  There are exemption laws in each state, as well as federal bankruptcy exemptions.  These laws allow debtors to retain exempt property while still receiving a discharge of debt in a bankruptcy case.

The exemption law that applies to the debtor’s bankruptcy case depends on where he or she has lived prior to filing bankruptcy, and for how long.  If the debtor lived in Arizona continuously for at least 24 months prior to the bankruptcy filing, then the set of exemptions under Arizona law applies to the bankruptcy case.  Otherwise, the exemptions are based on the law of a different state, or alternatively the federal bankruptcy exemptions may apply.

ARIZONA EXEMPTIONS

The Arizona exemptions are found primarily in Title 33, Chapter 8 of the Arizona Revised Statutes.  The Arizona homestead and personal property exemptions usually place a dollar limitation on the amount exempted.  For example, the Arizona homestead exemption protects up to $150,000, either in equity, or the fair market value of the house if owned free and clear of mortgage liens.  The $150,000 exemption applies to single debtors and married couples.

With respect to motor vehicles, the Arizona exemptions protect up to $6,000 in a single vehicle, either in equity or fair market value if owned free and clear.  Unlike the homestead exemption, each spouse receives a motor vehicle exemption; therefore, a married couple can protect two vehicles within the $6,000 limitation.  Spouses can elect to “pool” their exemptions to protect a single vehicle up to $12,000.  The exemption is doubled for disabled debtors, allowing each spouse who qualifies to exempt a motor vehicle up to $12,000.

Arizona does not have a “wildcard” exemption, unlike the federal bankruptcy exemptions and the exemption laws of some other states.  A wildcard exemption allows debtors to exempt any asset, or combination of assets, they choose within a certain dollar amount.  Wildcard exemptions are particularly useful to exempt assets that are generally not considered to be necessary items, such as tax refunds.  Debtors who have relocated to Arizona within the past 24 months should consider whether they would fare better by filing bankruptcy using the exemptions they are currently eligible to take, or by waiting to file bankruptcy until they are eligible for the Arizona exemptions.

EXEMPTION PLANNING

Planning for exemptions can mean the difference between going through bankruptcy without surrendering assets to a bankruptcy trustee and having to turn over something of value in exchange for receiving a discharge.  First and foremost, it is necessary to accurately determine the set of exemptions that applies to a case, and whether the timing of the bankruptcy filing is a factor.  Second, if it is not possible to exempt certain assets, then liquidating them and appropriately spending the proceeds prior to filing bankruptcy may be an option.

Exemption laws can be difficult to navigate, and it is best to consult with a knowledgeable bankruptcy attorney prior to filing bankruptcy.  It is too late to plan once the bankruptcy petition has been filed, and bankruptcy trustees will take advantage of any mistakes.