The bankruptcy court isn't out to punish you for filing for Chapter 7 protection, and it won't strip you of everything you own. Technically, when you file for Chapter 7 bankruptcy, your trustee takes possession of your assets. He distributes cash assets to your creditors. Other assets are liquidated or sold, then the proceed go to your creditors. Your bankruptcy discharges or erases any balances that remain after these payments. In some cases, your creditors may receive nothing, because you've used exemptions to protect your property from liquidation.
Exemptions in General
Exemptions are an amount of value in several different types of property that your bankruptcy trustee cannot sell to raise money to pay your creditors. Typically, they include a dollar limit for the amount of equity they will allow in your home or automobile. You can protect personal property, such as clothing, furniture or appliances, up to a certain value. When you use an exemption to protect an asset from liquidation, the property becomes immune from your bankruptcy proceedings. It remains yours -- just as though you had never filed for bankruptcy at all.
The Wildcard Exemption
Most exemptions apply to specific items of property: your homestead or home, car, life insurance, jewelry, books or appliances. However, they don't cover every eventuality for every debtor. For example, you might own a horse or an autograph collection that you cherish, but these things have value. Your trustee could therefore sell them to help pay down your debts if there are no specific exemptions available for equines or memorabilia. A wildcard exemption fills this void. You can apply it to anything you like, up to a certain value. Wildcard exemptions usually involve a dollar limit, plus a portion of any homestead exemption you're not using, because you're not trying to protect your home or because it has no equity. For example, the federal wildcard exemption is $925, and you can apply this to any possession you want to keep. You can also apply an additional $9,250 if you don't use all your homestead exemption. If your horse or autographs are worth $10,000, for example, the wildcard exemption will prevent you from losing them.
The federal government offers a list of exemptions, including a wildcard exemption. Individual states also have their own exemption lists, which vary somewhat from jurisdiction to jurisdiction. In several states, plus the District of Columbia and Puerto Rico, you have the choice of using the federal list or your state's list. The remaining states have opted out from using the federal exemptions, however. If you live in one of these jurisdictions, you can only use your state's exemptions -- and not all states offer wildcard exemptions.
If you're filing for bankruptcy and you're lucky enough to live in a state that offers a wildcard exemption or instead allows you to use federal exemptions, you can "piggyback" them to protect assets of higher value. For example, you might own a vintage automobile worth $13,000. If you choose the federal wildcard exemption, you can only protect $10,175 of that: $925 plus $9,250 of your unused homestead exemption. The federal exemption for an automobile is only $2,950, so that won't cover this particular asset either. If you add the automobile and wildcard exemptions together, however, you can protect your car's value up to $13,125. A wildcard exemption is exactly what it sounds like. It's something you can use in a variety of ways to protect what really matters to you.
Beverly Bird is a practicing paralegal who has been writing professionally on legal subjects for over 30 years. She specializes in family law and estate law and has mediated family custody issues.