May 28, 2017

Bankruptcy and Exempt Property: Common Mistakes

When you hire an unexperienced attorney you take legal chancesI have been practicing bankruptcy law for over forty years. This year I saw two cases in bankruptcy court illustrating the danger of hiring a so-called bankruptcy attorney who didn’t understand the fundamentals of exempt property.

First, a primer on exempt property

I typically refer to property that creditors cannot reach as exempt property. Although there are many exemptions created by other statutes and by case law, the primary source of exemption law available to residents is set out in North Carolina General Statutes §1C-1601(a).

The most commonly applicable exemptions in North Carolina:

  • $3,500 in an automobile
  • $35,000 homestead exemption (note: debtor’s name must be on the deed)
  • $5,000 for household goods and furnishings (including clothing, computers, art, guns, pets, jewelry, etc.), and an additional $1,000 for each dependent
  • $2,000 for tools of the trade (such as a laptop if used for business purposes)
  • A maximum of $5,000 in value of any property that would otherwise be nonexempt: stocks, bonds, equity above the maximum allowed for an automobile, etc. This is known as the “wild card” exemption, is limited to $5,000.00, and is further limited to the amount of any unused homestead exemption. So, if a debtor claims a $35,000.00 North Carolina homestead exemption, she cannot claim any wild card exemption in any amount. However, if she claims only a $30,000.00 North Carolina homestead exemption, she can use a wild card exemption to protect property worth up to $5,000.00.

Two bungled cases in bankruptcy court last week

Back to the narrative. In the first instance, a debtor claimed less than he was entitled to.  The judge said that the debtor could not “impeach” his sworn claim for exemption by amending.

In the second case, the debtor claimed a trailer (motor vehicle) as household goods.  The joke around the courthouse that day was that the next thing will be requiring a license plate for a living room sofa.

One of the most important things to get right in a bankruptcy filing is exempt property; the debtor wants to hold on to all that property while the creditor wants just the opposite. It is all to frequent to see improperly filed claims for exemptions, which can result losing them all together.   This can happen when otherwise exempt property is not claimed as exempt.  It can happen when the amounts claimed as exempt are not correct.

Not every case requires that the attorney be certified by the North Carolina State Bar Board of Legal Specialization as a bankruptcy and insolvency specialist, as I am, but it’s a start as you consider whom to hire to represent your interests. Let’s talk about your case, whether you are a debtor or a creditor.