Many residents of Northern Virginia avoid filing a petition for bankruptcy because they are afraid that the court will seize all of their assets, including their home. This belief greatly overstates the power of the bankruptcy court and distorts the exact working of the bankruptcy process.
Every state, including Virginia, permits a debtor to designate certain assets that are beyond the reach of creditors. These assets are generally referred to as “exempt assets.” Most importantly, the debtor may designate up to $5,000 in equity in the family home as exempt from claims of creditors (except any institution that holds a valid mortgage on the property). This amount can be increased by $500 per dependent. If the house is sold during bankruptcy, $5,000 of the sale proceeds are exempt; if both a husband and wife are declaring bankruptcy and are joint tenants in the homestead, the exemption amount may be doubled.
Benefits from a number of different insurance policies are also exempt. Accident and sickness benefits, burial society benefits, group life or accident insurance benefits for government employees, and other group life insurance policies are exempt. Miscellaneous personal assets are exempt, including up to $2,000 value in an automobile, household furnishings up to $5,000, recovery for personal injuries and certain jewelry, including wedding and engagement rings.
Once exempt property has been removed from the bankruptcy estate, the bankruptcy trustee will usually sell the non-exempt assets and divide the proceeds of this sale among the debtor’s unsecured creditors.
The federal bankruptcy code also contains a list of allowable exemptions, but this list is different from Virginia’s state list. Anyone considering bankruptcy will benefit from consulting with a knowledgeable bankruptcy attorney about choosing assets that will be declared as exempt from creditors’ claims.