Exempt property in Chapter 7 bankruptcy for Wisconsin debtors

While actual bankruptcy laws are often nuanced and complex, the basic idea behind bankruptcy is to give a person a fresh financial start after being overwhelmed by debt. In a so-called "liquidation" bankruptcy, also called "Chapter 7" (of the U.S. Bankruptcy Code), the debtor files a petition for bankruptcy and the court orders all legal proceedings related to the debtor's debts, including collection, to stop.

Exemptions

The debtor's nonexempt property is sold to pay down his or her debts, but "exempt" property is protected from availability for debt payment; the debtor may keep exempt property. After all, bankruptcy is not meant to push the debtor into poverty, but rather to allow him or her to start over with life's basic necessities.

In practical terms, most Chapter 7 debtors do not have assets beyond what is exempt, so they do not have to part with much in bankruptcy.

Bankruptcy is a creation of federal law, but state laws can also play major roles. One of the main interactions between federal bankruptcy law and state law is the determination of which property will be exempt. The federal Bankruptcy Code lists available exemptions or the debtor may instead choose to use exemptions under his or her state's laws.

However, each state has the option to "opt out" of this scheme, meaning that debtors in an opt-out state can only use their state's exemptions and not the federal. Wisconsin has not opted out of the choice between federal and state exemptions, so Wisconsinites filing for Chapter 7 bankruptcy may choose.

Still, even if a Wisconsin debtor chooses the state exemptions, some kinds of property may remain exempt under federal law.

Seek legal guidance

The decision whether to use federal or Wisconsin exemptions is complex and it is smart to retain an experienced Wisconsin bankruptcy attorney who can analyze the debtor's property carefully and advise which exemption scheme would be more advantageous.

The choices

Here are comparisons of federal (federal dollar amounts are adjusted every three years for inflation) and Wisconsin exemptions for some major assets:

  • Residence: Wisconsin protects up to $75,000 in value of the debtor's residential homestead from creditors (or $150,000 jointly with spouse), except for mortgages and similar liens that are secured by the residence. Federal law exempts up to $22,975 in interest in real or personal property used as a residence by the debtor or by his or her dependent.

The issue of the residence is more complex than just the amount of exemption that applies under federal or state law. In Chapter 7, while a foreclosure action is stayed by the bankruptcy, it is likely that the home may be lost to the lender in satisfaction of the defaulted mortgage after the bankruptcy ends.

Another option is a Chapter 13 reorganization bankruptcy, wherein not only is the foreclosure proceeding stopped, but also the debtor may make up past due payments during the bankruptcy so long as other payments stay current, often allowing the debtor to keep his or her home and its mortgage after the bankruptcy ends.

  • Motor vehicle: Wisconsin protects up to $4,000 in value of a vehicle ($8,000 if jointly with spouse) or more if the debtor uses part of the separate exemption of $12,000 in personal property toward the vehicle. Federal law exempts up to $3,675 in value of a vehicle.
  • Retirement accounts: For the most part retirement accounts are exempt under both federal and Wisconsin law.

This article only scratches the surface of exemptions. The advice of a bankruptcy lawyer is encouraged.