Learning the Lingo (Issue 1), Exempt vs. Non-Exempt in Bankruptcy.

If you have met with a bankruptcy attorney, you probably heard the words ‘exempt’ or ‘exemptions’ at some point during the conversation. Exemptions are laws that give persons the right to hold on to certain things they own notwithstanding the fact that those things could be sold to pay something to your creditors. In bankruptcy you must disclose all your assets and the value of those assets.  An example; you own a car that is worth $9,000 and owe the bank $7,000 on that car; as a result, you have $2,000 equity in that car. Potentially, if you sold that car, you could pay $2,000 to your unsecured creditors (e.g. credit cards). However, Colorado provides a $5,000 vehicle exemption; which means neither an unsecured creditor nor the bankruptcy trustee can force you to sell your car to get at that $2,000 because the equity falls within Colorado’s vehicle exemption. Net result, you keep your car.

An asset is non-exempt if its equity exceeds the exemption amount or if there is no exemption that protects the asset. An example; you own a home worth $300,000 and owe the bank $200,000; as a result, you have $100,000 of equity in that home. Colorado provides a $60,000 home equity exemption (known as the Homestead exemption); as a result, you have $40,000 of non-exempt equity in you home. If you filed chapter 7 bankruptcy, the trustee can force the sale of your house to get at that $40,000 of equity. No bankruptcy attorney worth 2 cents would put a client into that position unless there was a good reason to do so, but this example is illustrative of non-exempt assets. The most common non-exempt asset is a person’s tax refund. A good bankruptcy attorney can provide you options for maximizing the benefit to you of non-exempt assets before filing bankruptcy. 

So, exemptions are the laws that allow you to keep your property and things that you own in bankruptcy and protect those things from debt collectors. Most of Colorado’s exemptions can found in Colorado Revised Statutes 13-54-102.