May 28, 2017

Marital Property and Bankruptcy: Allocating Exempt Property

When one person in the marriage files for bankruptcy protection, how does it affect the other?Each state has different laws on what is recognized as exempt property, that is, property that is out of the reach of creditors (including bankruptcy trustees). Further, there are federal exemptions. I wrote about this extensively and you may find it helpful reading.

Here’s the kind of question that occasionally comes up when we counsel a married couple about bankruptcy.

Q: The exempt property statute is not clear as to how North Carolina’s statutory exemptions apply to a married couple contemplating filing a joint Chapter 7 petition, or facing execution on a judgment against both of them.  Do you, in effect, double these?

The answer is “yes.”

  • $3,500 in an automobile
  • $35,000 homestead exemption (note: the home must be in North Carolina, the debtor must an owner on the deed, and it must be the debtor’s principal residence)
  • $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, and it is limited to $5,000 for each debtor, and is further limited to the amount of any unused homestead exemption.  So, if a debtor claims a $35,000 North Carolina homestead exemption, she cannot claim any wild card exemption in any amount.  However, if she claims only a $30,000 North Carolina homestead exemption, she can use a wild card exemption to protect property worth up to $5,000.
In other words, how is the total of exempt property between a married couple calculated?

A: Ownership, not marital status, is key.

Example One: Wife drives a Mazda worth $3500, paid off/no liens, and the title lists Husband only as owner. Husband drives a Ford worth $5000, paid off with no liens,and the title lists Husband only as owner. Wife cannot use any of her $3500 vehicle exemption because she doesn’t have any ownership interest in either vehicle. Husband can use his vehicle exemption to protect the first $3500.00 in equity in one vehicle or the other, and can use his wildcard exemption to protect the remaining vehicle equity, assuming he doesn’t want to use it on other property, and has not used his full $35,000 homestead exemption.

Example Two: Husband works as a contractor, and in his work, uses a pickup truck that he owns, worth $2500 (paid off, no liens), and tools that he owns, worth $2000. Husband can claim a $2000 tools of the trade exemption to protect the tools, the first $2000 in value in the pickup, or some portion of both, limited to a total of $2000 (say, $1500 in the tools and $500 in the truck). Wife cannot use any tools of the trade exemption to protect these items because she does not own them and use them in her work.

These are the kinds of questions addressed in a bankruptcy counseling session.