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Will I Lose Everything If I File Bankruptcy?

One myth that prevents many people from filing bankruptcy when they really need to, is the belief that filing for bankruptcy means that an individual will lose their property. Many are surprised to find out that this could not be further from the truth. Most people who file bankruptcy are allowed to keep all of the property they own. Despite the misconception that declaring bankruptcy will leave a person with no worldly possessions to call their own, there are provisions in place to protect against this very thing in the form of exemptions under federal and state law.

Constitutional vs. Statutory Exemptions

In North Carolina, there are technically two avenues through which a person can seek to exempt property from bankruptcy. The first is through the state’s constitutional exemptions, but these are hardly ever used as they are extremely limited and exempt a much smaller amount. Debtors usually opt to use the constitutional exemptions if, and only if, they failed to timely file statutory exemptions (for more on these, see below). This is because constitutional exemptions can be asserted at any time before the seizure of property. However, the constitutional exemptions only allow for $500 worth of personal property and $1,000 towards a homestead. These amounts were literally crafted during the Civil War and have not been amended to keep track with inflation because statutory exemptions followed soon after, rendering the constitutional exemptions essentially moot, save for the very small minority of debtors who fail to properly file statutory exemptions.

The Statutory Homestead Exemption

In contrast to the extremely limited constitutional Homestead exemption, North Carolina’s statutory Homestead exemption allows a single debtor to exempt up to $35,000 in equity in real property that they use as a primary residence or in a burial plot set aside for the debtor or one of their dependents. (Equity is the current value of an asset minus the amount that you have paid off in loans on that asset.) If the debtor is unmarried and 65 years of age or older, the Homestead exemption can allow them to exempt up to $60,000 interest in their homestead property provided that they owned the property with a previously deceased spouse. If the bankruptcy is filed jointly by a married couple, they are allowed to exempt up to $70,000 in their homestead.

The Statutory Wildcard Exemption

Although the so-called “Wildcard” exemption may sound as exotic a topic as any when it comes to bankruptcy law, the concept is really quite simple. The Wildcard exemption only applies to the extent to which you do not fully utilize your Homestead exemption. This works to the advantage of debtors who rent instead of own, or who own so little equity in their home that they let it go to creditors in the bankruptcy.

This means that, for example, if a person owns $30,000 in equity in their primary residence, they can exempt that interest through the Homestead exemption and still have $5,000 available through the Wildcard exemption. However, a debtor who owns, for example, $50,000 in equity in their primary residence would have to choose between using all of their potential Wildcard exemption towards the maximum $35,000 in their homestead, or only exempting $30,000 worth of equity in their homestead to preserve their $5,000 Wildcard exemption.

The main benefit of the Wildcard exemption is that it can be used towards any assets, including bank accounts.

Other Statutory Exemptions

In addition to the Homestead and Wildcard exemptions, North Carolina law provides exemptions for specific categories of property. These exemptions include $3,500 in equity in one motor vehicle, $5,000 in other personal property/household goods (plus $1,000 for each dependent up to $4,000), $2,000 in “tools of the trade” the debtor requires for his or her work, and earnings from the last 60 days that are necessary for family support. In addition, life insurance, IRA, pension and 401k values may be up to 100 percent exempt.

Federal Exemptions

Certain states, including Kentucky, Texas and New York, allow debtors to opt to use federal bankruptcy exemptions instead of the exemptions provided for by their state. North Carolina is not one of these states, so debtors filing here must use the ones provided for by this state’s bankruptcy code, provided they have been continuously domiciled here for two years. If a debtor has not been domiciled in North Carolina for two years, then the exemption rules of the state that the debtor resided in for the 6-month period prior to the two years preceding bankruptcy apply. If a debtor does not qualify for any state’s exemptions, then the federal exemptions may be used.

As of April 1, 2019, the federal exemptions include:

  • Homestead – Up to $25,150 of equity in real property that is used as a primary residence or in a burial plot set aside for the debtor or one of their dependents;
  • Motor Vehicles – Up to $4,000 of equity in one motor vehicle;
  • Household Goods – Up to $13,400 in household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments, that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor, however no one item can exceed $625 in value;
  • Tools of the Trade – Up to $2,525 in value in any implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of the debtor; and
  • Wildcard – $1,325, plus up to $12,575 of any unused homestead exemption.

These amounts are doubled for married couples filing a joint bankruptcy.

If you are filing for bankruptcy, it is critical to have the assistance of a skilled bankruptcy attorney to ensure that your case is properly filed and that you take advantage of every available exemption. Otherwise, you could lose property that should be exempt to creditors once you file. With offices in Charlotte, Monroe, and Mooresville, the law firm of Arnold & Smith, PLLC handles bankruptcy cases for the Western District of North Carolina. Contact Arnold & Smith, PLLC today to set up a free initial consultation.