Commentary: Raising the Bar - Brush up your bankruptcy, part IV

Daily Record and the Kansas City Daily News-Press, Dec 28, 2004 by Paul Mark Sandler

(This article originally ran in The Daily Record, Baltimore, MD, another Dolan Media publication).

We have before us a Mr. John Poor, a man whose troubles may resemble those of a client you will see later today or next week. He may, in fact, remind you of someone you know. For Mr. Poor is nothing more or less than a typical, down-and-out debtor fresh out of good luck as were the 1.6 million Americans who filed for bankruptcy in 2003.

Mr. Poor is poor but hardly alone; the number of consumer filings in 1995 was roughly half the 2003 sum, according to the American Bankruptcy Institute. As personal filings have become increasingly common, any lawyer serving families and individuals should have some familiarity with what people like Mr. Poor can expect to lose and keep in a standard bankruptcy proceeding.

As we have discussed in previous columns, at the heart of the U.S. Bankruptcy Code is the belief that debtors deserve a fresh start. With that in mind, let's examine the basic particulars of this hypothetical case. Our Mr. Poor is a construction worker recently hit by a drunk driver. His motorcycle survived, but his noggin was fractured. He missed two months of work and lost $5,000 in wages before being laid off.

The filing of his bankruptcy petition creates an estate that includes just about all property the debtor has a legal claim to (from bank savings to sofas to diamond rings to real estate). In a Chapter 7 case, these sundry items are to be sold by the court- appointed trustee, who will use the proceeds to pay off creditors. Yet the Bankruptcy Code allows a debtor to exempt some property from such action, thus protecting people like Mr. Poor from literally losing their shirts.

Like all debtors, Mr. Poor is required to fill out a series of schedules. Filed under oath, these schedules itemize all assets and include both personal property, such as clothing and cars, and real property, such as houses and land. They demand that the debtor list current market value for each item.

In so filing, Mr. Poor states that his household goods and furniture have a total market value of $1,000; his clothes have a total market value of $500; his motorcycle, which he owns free and clear, has a market value of $400; and his construction tools have a market value of $2,500.

He also lists his checking account with a $100 balance, a 401(k) plan with total contributions of $100,000, and a lawsuit against the drunk driver in which Mr. Poor seeks $5,000 for lost wages and $10,000 for pain and suffering. Finally, Mr. Poor lists a parcel of land that he owns free and clear in Austin, Texas. According to a recent appraisal, the land is worth $10,000. Mr. Poor rents, but does not own, the house in which he lives.

How much of the above-mentioned assets will Mr. Poor be able to keep? This will depend on the state where Mr. Poor lives, as the Bankruptcy Code allows states to dictate the exemption of a domiciliary of that state. For Maryland residents, we apply the Maryland exemption scheme.

House and home

The first commonly asserted Maryland exemption, referred to by some practitioners as the Household Exemption, allows a debtor to exempt $1,000 worth of household furnishings, goods, clothes, appliances, books, animals kept as pets and other household items. Mr. Poor, who estimated all his household goods and furniture to be worth $1,000, can take the full Household Exemption. He will have to rely on other exemptions to keep his remaining assets.

A second commonly asserted Maryland exemption is the Property Exemption, which allows a debtor to shield $5,000 in real or personal property. Mr. Poor can apply this exemption towards his clothes ($500), his motorcycle ($400), and his checking account ($100). This leaves Mr. Poor with $4,000 remaining of his Property Exemption. He may apply this amount to other assets, provided that those assets are either real or personal property.

That brings us to the Wildcard Exemption, which allows a debtor to protect $6,000 in cash or property of any kind. Using this exemption plus the remaining $4,000 of his Property Exemption, Mr. Poor can fully protect the $10,000 lot he owns in Austin. (That fact that Mr. Poor's lot is located in Texas does not prevent him from doing this.)

Note that, with the exception of the Wildcard, exemptions are restricted to certain types of assets. Mr. Poor can exempt his clothes under the Household Exemption, but not his motorcycle, which falls under a different category.

That said, debtors are allowed much flexibility in how they use exemptions. A single exemption may be applied to two or more assets, allowing Mr. Poor to rely on the Property Exemption to protect his clothes, motorcycle, and checking account balance. Similarly, two or more exemptions may apply to a single asset. Mr. Poor can use both his Wildcard and Property Exemptions to fully exempt his Texas land. Deciding how to assert the exemptions is a simple question of maximizing protection for the assets on the table, so to speak.