The Scoop on Exemptions and Overages in a Chapter 7 Bankruptcy

Questions about exemptions and overages are the most frequently discussed issues in a Chapter 7 bankruptcy consultation. One of the major concerns for debtors in Chapter 7 bankruptcy cases is what happens to their personal property after the bankruptcy is filed, and many potential clients are, in fact, hesitant to file for bankruptcy simply because they don’t want to relinquish their belongings to the Chapter 7 trustee.

Although there are some circumstances when you might have to surrender something to the Chapter 7 trustee, it’s a big bankruptcy myth that once you file for bankruptcy, you lose all your stuff.

Let’s talk about how it works. Before you file a bankruptcy, one of our attorneys will sit down with you and go over your estate. In bankruptcy, your estate is composed of everything you own at the time you file—houses, cars, boats, jewelry, televisions, clothing, toasters, etc., plus things you are entitled to in the future. You and your attorney will discuss what all these items might be worth today if you sold them.

With respect to personal effects—things that aren’t houses and cars and such—you’re looking to come up with liquidation values. Essentially, if you had a great big “everything must go” yard sale right now, what would you be able to get for all that stuff? That number is important because your bankruptcy attorney wants to exempt your personal property from the bankruptcy estate, and bankruptcy law only allows for a certain dollar amount for exemptions.

When you exempt property in bankruptcy, it’s protected from creditors, and the trustee is prohibited from taking exempt property and selling it to pay off your debts. Under Florida law, a bankruptcy debtor is entitled to a personal property exemption of $1,000, which means that $1,000 worth of your stuff is protected. Also, if a debtor doesn’t claim the benefits of the homestead exemption, that debtor is entitled to an additional $4,000 “wild card” exemption that can be used to protect personal property.

But what happens if you use up all your exemptions and it still doesn’t cover all your stuff? It’s uncommon, but it does happen. If your bankruptcy attorney just can’t work the numbers so that all of your property is exempt, and the value of your property exceeds your available exemptions, you have what’s called an overage. The overage amount is the difference between what your property is worth and what has been exempted from the bankruptcy estate. So, for example, if you have $6,500 worth of personal property, and you can only have $5,000 in personal property exemptions available, then you have an overage in the amount of $1,500.

If you have an overage, it’s not the end of the world. However, an overage must be dealt with appropriately before a debtor can receive a bankruptcy discharge. There are two ways to deal with it: you can surrender enough property to the Chapter 7 trustee to cover the overage, or you can pay the overage amount to the bankruptcy trustee.

In Southwest Florida, we are fortunate that our Chapter 7 trustees agree to allow individuals time to repurchase assets from their bankruptcy estate. Typically, if you’re interested in paying the amount back to the trustee so that you don’t have to surrender any property, the trustee won’t demand a lump sum all at once. Depending on the amount of the overage, the trustee may offer you a monthly payment plan for up to a year to pay it off.

Exemptions are complicated mechanisms in bankruptcy law. If you’re considering bankruptcy and you’re trying to fill out the paperwork yourself, you may quickly find yourself in over your head. If you don’t know what exemptions are available to you and how to apply them, chances are you’re not going to be able to use them for your maximum benefit. It’s best to consult with an attorney who knows the ins and outs of bankruptcy law to assist you with your case.

Call The Dellutri Law Group today to schedule a free initial consultation to discuss the financial issues you are facing. You may be surprised at the options available to you.