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Chapter 7 bankruptcy and the homestead exemption

Chapter 7 bankruptcy provides most bankruptcy clients with a clear and relatively painless path to getting a fresh financial start. While Chapter 7 is the most common form of bankruptcy, its nickname "liquidation bankruptcy" can scare some prospective clients. Tennessee readers considering filing for bankruptcy, but concerned about the effect filing will have on the rest of their financial well being should continue reading.

When a debtor files for Chapter 7 bankruptcy relief in the form of a bankruptcy petition, they are required to disclose their finances to the court. This consists of a snapshot of a person's assets, including retirement accounts, stock portfolios, bank account balances and property values. It is then the job of the trustee to decide which of the person's assets are unprotected and whether to sell any assets to pay back creditors.

While this may sound frightening, in many cases, clients retain the majority, if not all, of their assets. That's because of bankruptcy exemptions. Bankruptcy exemptions refer to certain selections bankruptcy filers get that protect certain assets from liquidation. One such exemption is the "homestead exemption." The "homestead exemption" protects a portion of the equity in a person's primary residence from liquidation.

Two important issues to discuss with an attorney before filing, however, are the amount of equity that is protected and how the asset is valued. With the homestead exemption, for example, the amount of equity protected differs depending on the state and whether a person chooses federal or state exemptions. Also, unlike many assets, the value, and thus the equity, in property fluctuate making it more difficult to value.

Generally speaking, the value is determined at the time of filing. Furthermore a case cannot remain open forever. In most situations a Chapter 7 bankruptcy case will close within three to six months after filing, and it cannot be reopened if the value in property should change. This is vital since the debtor needs the certainty of closure to find the fresh start and end to the financial challenges they crave.

Source: Forbes, "How Safe is My Home in Chapter 7 Bankruptcy?" Justin Harelik, August 21, 2013

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Mark T. Young & Associates
2895 Northpoint Blvd.
Hixson, TN 37343

Toll Free: 888-376-0282
Phone: 423-933-1606
Fax: 423-877-0363
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