Exemptions

• Federal bankruptcy law provides a list of property exempt from Chapter 7 sale. For example, if the equity in your home -- the value above the mortgage debt -- is $21,625 or less, as of 2011, the trustee can't sell it. Some states offer residents a different list of exemptions and some states let residents pick either the state or federal list. If all of your assets are exempt from sale, you may be able to complete Chapter 7 without paying your creditors anything.
  
  

Bankruptcy Estate

• Some Chapter 7 exemptions may be outright -- Florida, for instance, exempts your primary residence, no matter what the value -- while other exemptions set a dollar amount. If you have a $100,000 mortgage debt on a $120,000 house, the debt plus the federal $21,625 exemption would protect your home from sale. You'll need an appraisal -- in some states, more than one -- to set your property's value. If you claim your property is completely exempt, the trustee can challenge the appraisal in court. Your attorney will have to present evidence in court that the valuation is sound.
  
  

Interpretations

• Sometimes the disagreement with the trustee may hinge on how the court should interpret the bankruptcy code. In one Michigan bankruptcy case, the trustee argued that the exemptions the state granted bankruptcy filers clashed with provisions of the federal bankruptcy code. In a 2007 Florida bankruptcy, the trustee claimed the power to sell the debtor's $1.4 million IRA. The IRA normally would be exempt, but the trustee argued that as the debtor had made prohibited investments with the IRA, the court should void the exemption.
  
  

Considerations

• In both the Michigan and Florida cases, the bankruptcy court sided with the trustee. The debtors appealed and the cases went through several rounds of higher-court hearings before receiving a final ruling in favor of the trustees. If your attorney and the trustee cannot reach agreement and the bankruptcy judge sides with the trustee, you can choose to appeal. You might want to consider whether the legal fees it could take to resolve the case will cost you more than you'd lose by losing the exemption.