Each state has a set of laws that allow you to protect certain property from seizure by creditors. These laws are known as exemptions. In addition to state exemption laws there are also a broad set of federal exemption laws that protect certain property from creditors. The exemption laws might limit the amount of a garnishment on your wages by a creditor or prevent a creditor from putting a lien on the home you live in or stop the garnishment of protected funds like the proceeds of social security. Our home office is in Kansas, so we will approach this subject from that perspective.
In bankruptcy those exemption laws are used to shield your property from the bankruptcy trustee. When you file a bankruptcy case you must list all of your property and then choose your exemptions. In a chapter 7 case the trustee cannot seize and liquidate the property that is claimed as exempt.
State Exemptions for Protected Property in Kansas
In Kansas there are a set of state exemptions that protect your homestead. All the equity in the house you live in is protected by law from the bankruptcy trustee. This homestead exemption applies to the house and up to one acre surrounding the property. If you are operating a farm it applies to up to 160 acres surrounding the property.
The homestead exemption can be limited if the equity is more than $170,350 and the home was purchased within 1,215 days (about 3 years and 4 months) of the filing of the bankruptcy. This law is a federal limitation that applies to state exemptions only in bankruptcy. It does not limit your exemption on your homestead outside of bankruptcy. It was designed to make it more difficult for people to cash out non-exempt assets and move to a state with better exemptions to shield more of their property.
Kansas also has an exemption that covers all of your basic household goods and furnishings, electronics, and necessary clothing in an unlimited amount. The necessities you need to operate your home including food and fuel for up to a year are also included. These exemptions allow you to maintain your basic household without any risk of the trustee seizing your basic belongings.
Kansas has an exemption for up to $20,000 of equity in your vehicle. If a married couple files this includes an other $20,000 for a second vehicle. These vehicle exemptions are meant to cover your daily driver. If you have a vehicle that is not a daily driver then the exemption cannot be applied to that vehicle. An example of the exemption not applying is if you have two vehicles in your name and both are paid for you can only protect one of them. If the first vehicle is your daily driver but the second is one you loan out to a friend then you can only exempt the first vehicle. The second vehicle could be seized by the bankruptcy trustee for the benefit of your creditors.
Retirement Accounts, Government Benefits, and Other Protected Property in Bankruptcy
The money in tax exempt retirement accounts is also protected by law and cannot be seized. The money in the accounts is protected by law unless you cash the money out. Once it is cashed out it is no longer protected by law. There are exceptions for inherited accounts so you need to make sure your attorney knows if you have inherited an Individual Retirement Account. Those accounts are not normally protected by the exemption laws in Kansas.
Money you receive from social security, veteran’s benefits, and certain other government sources are also exempt and cannot be seized by the bankruptcy trustee. It is important that you keep these funds separate from any other incoming money so it is easy to trace what money came from what source. When you have a paycheck and social security funds deposited in the same bank account there can be an issue about whether or not the social security funds retain their exempt status if they have been commingled with non-exempt money.
The Earned Income Credit from a single year of your tax refund is also protected by law. The Child Credit and any taxes over withheld are not protected. If you file a bankruptcy and you are getting a tax refund the next year you can exempt the Earned Income Credit portion of the upcoming tax refund. If you filed the bankruptcy and you had two years of unfiled taxes and you expected a refund from both years you would have to choose which year to apply the exemption. You could not exempt both years of the Earned Income Credit.
There is also an exemption for up to $1,000 of value in jewelry. This is value based on what things are worth, not what you paid for them so we often find that even though people paid more money for their jewelry than $1,000 they could not sell it today for more than 30% of the purchase price. In part when you buy jewelry you are paying a markup for the artisan’s fee to produce the jewelry. The resale value is much lower.
If you have a trade or profession and there are tools you need to do your job then you will be able to claim the Tools of the Trade exemption. This covers $7,500 worth of equipment, tools, or machinery that you use in your job. In some cases you need to have an appraisal done so you can show the court how much the property is worth today which might be much less than what you paid for it.
Workmen’s compensation claims, Social Security Disability claims, and VA Disability claims are also protected by law. If you have a pending claim for any of these things it can be protected from the bankruptcy trustee. Personal injury claims are not protected or exempt and can be seized by the bankruptcy trustee.
If you are owed child support or spousal maintenance then it is exempt and protected by law. Those funds cannot be seized by the bankruptcy trustee. This includes past due money you are owed and money you receive monthly.
Exemption laws can be complex and require planning to use properly. You should always consult a bankruptcy attorney to plan out the use of the exemption laws. In many cases you can plan out how the exemptions will be used and you might convert non-exempt property into exempt property. Laws vary from state to state, so please contact us to make sure the details of your case get handled correctly. We are always ready to go over your options and answer your questions about bankruptcy matters. Please contact us at your convenience.